US soft landing likely to trigger start of Fed cutting cycle; ECB moving forward carefully with rate cuts; China’s main growth engines weakening
US
US soft-landing economy supports expectation of Fed’s 25bps rate cut at the meeting on 17-18 September. Consumer price inflation in August slowed to 2.5% YoY from 2.9% in July, but core inflation was steady at 3.2%. Meanwhile, producer price inflation slowed to 1.7% from 2.1%. Additionally, results from the first US presidential debate show that Kamala Harris from the Democratic Party won against former President Donald Trump from the Republican Party, with a score of 63% to 37%.
The overall US economic outlook still indicates a slowdown ahead due to (i) the continued decline in job openings to their lowest level since January 2021; (ii) the sharpest contraction in manufacturing activity in 8 months; and (iii) increasing debt defaults. Markets are now seeing a higher likelihood of the Fed cutting rates by 50bps. However, there are no obvious signs of a US recession as consumer spending continues to grow, consumer confidence has reached a 4-month high, and the services sector is expanding. Given signs of economic expansion and steady underlying inflation (above 3%), Krungsri Research assesses that the Fed will likely proceed with gradual rate cuts of 25bps at each remaining meetings this year to maintain price stability and support medium-term economic growth.
Eurozone
The ECB has cut interest rates as expected and revised down economic forecasts for 2024-2026. The European Central Bank (ECB) decided to cut its deposit rate by 25bps to 3.50% and its refinancing rate by 60bps to 3.65%. The statement indicated that future monetary policy decisions would be data-driven without pre-set directions. Additionally, the ECB has downgraded its Eurozone economic growth projections, estimating 0.8% growth for 2024 (from 0.9% in the previous forecast), 1.3% for 2025 (from 1.4%), and 1.5% for 2026 (from 1.6%).
The Eurozone’s economic recovery remains fragile and uncertain due to (i) the reduced support from fiscal policies, (ii) slower consumption growth caused by relatively high interest rates and living costs, (iii) a slowdown in investment due to declining business profits, (iv) uneven growth among key countries, and (v) limited credit recovery amid still-high interest rates. Additionally, risks from trade tensions with China and uncertainties following the US presidential election will pose challenges to the Eurozone’s recovery. We expect the ECB to cut interest rates one more time, bringing the policy rate to 3.25% by the end of this year.
China
Chinese economy is slowing despite some support from exports. Headline inflation edged up from 0.5% YoY to 0.6% in August, while core inflation eased slightly from 0.4% to 0.3%. Producer Price Index (PPI) fell deeper from -0.8% to -1.8%. Retail sales growth slowed from 2.7% to 2.1%, and industrial output growth decelerated from 5.1% to 4.5%. Meanwhile, exports grew by 8.7%, the highest growth since March 2023, but with higher risk given several countries’ plans to raise import tariffs on Chinese goods. Recently, after imposing provisional tariffs, the EU will vote on September 25 for tariffs of up to 45% on Chinese EVs. The US will also enforce tariffs of 100% on EVs, 50% on solar cells, and 25% on steel, aluminum, and EV lithium-ion batteries on September 27.
The drop in core inflation to a 3-year low, the accelerating fall in the PPI, sluggish consumption, and slowing growth in industrial output all clearly signal an economic slowdown. Although the PBOC has signaled to cut borrowing costs to stimulate consumption and investment, the positive impact might be limited under the pressures from excess supply, weakening service sectors, and worsening trade tensions. Thus, China risks facing continued slowdowns in consumption, investment, labor markets, and overall economic growth for the remainder of this year.
Consumption weakening in Q3; Q4 growth to benefit from THB 10,000 payments to low-income earners
Private consumption has weakened, reflected in the fall in the Consumer Confidence Index to a 1-year low. Consumer fears over only slow growth in the economy, the lack of clarity over the direction of policy following the recent change in the government, the ongoing conflict in the Middle East, and a slowdown in the global economy and the possible impacts of this on Thailand have combined to undercut sentiment. In August, the Consumer Confidence Index declined for the 6th consecutive month to 56.5 from 57.7 in July.
The continuing slide in consumer sentiment to its lowest since August 2023 reflects the losing momentum of private consumption growth, which has become clearer in Q3. This is in line with the Bank of Thailand’s data showing that as a result of weakening spending on durables, the Private Consumption Index (PCI) was almost unchanged in July, inching up just +0.2% YoY. In our view, the outlook of consumer spending is likely to improve in the last quarter of 2024 thanks to the impact of the new government’s stimulus measure. With a change in the digital wallet policy, payments of THB 10,000 in the first phase of this policy will now be made directly to over 14 million low-income earners. The government expected to begin making these transfers in late September. Funding for this will come from an additional THB 122 bn in the FY2024 annual budget together with THB 20 bn in budget management for FY2024. It is not yet clear when and how phase two payments will be made to those registered with the program. However, growth in consumption will face headwinds in the form of high levels of household indebtedness and the impact of flooding on incomes within the agricultural sector.
The new government has announced ten priority policies that it hopes will help to address the country’s social and economic problems. Prime Minister Paetongtarn Shinawatra’s new government has announced a list of ten policies to be urgently implemented (see table). Over the mid- to long-term the government hopes to keep its focus on restructuring the economy, transforming industries, and developing new engines of growth, with the expectation that this will help to establish the strong and sustainable foundations needed for future expansion in the economy.
Although the recent change in government has not resulted in a political vacuum, the implementation of new policies may be somewhat delayed. The current administration is composed largely of the same coalition of parties, and because there is considerable continuity between the old and the new, the ten priority policies are mostly extensions of previous initiatives. However, the new government’s success in implementing these will be dependent on: (i) clear and effective planning, and a careful ordering of policies according to their importance and impacts; (ii) balancing the need to allocate sufficient funding with maintaining fiscal discipline; (iii) using technology to enhance government administration and to improve public access; (iv) developing partnerships with the private sector and civil society; and (v) ongoing monitoring and evaluation of implementation, and then adjusting policies in accordance with evolving realities.
