US Fed rate-cutting cycle begins; BOJ leaves rates unchanged but indicates future hikes possible; Chinese rate cuts expected in Q4
US
Fed cuts interest rates by 50bps to address economic slowdown. Gradual rate cuts are expected. At its meeting on 17-18 September, the FOMC decided to cut its policy rate for the first time in 4 years by 50bps to 4.75-5.00%. The Fed projects US economic growth to average 2.0% between 2024 and 2027. Unemployment is expected to rise slightly to 4.4% in 2024 before declining in 2026 and 2027, while inflation is forecast to drop to the 2% target by 2026. For the latest economic data, retail sales grew by 2.13% YoY in August, slowing slightly from 2.86% the previous month but better than market expectations. New home sales increased by 9.6% MoM, and building permits rose by 4.9%. Weekly initial jobless claims fell by 12,000 to a four-month low.
The US economy continues to grow at a low rate, challenged by contracting manufacturing activity, rising loan defaults, and a cooling labor market. However, consumption and the service sector are expanding, which has reduced the risk of the US recession. With the backdrop of a soft-landing economy, still-high core inflation, and the latest Fed’s Dot Plot, Krungsri Research expected the Fed to further cut interest rates at its remaining two meetings this year by 25bps each, reaching 4.25-4.50% by the end of the year.
Japan
BOJ holds interest rate at 0.25%, awaiting economic and inflation developments for future hikes. The Bank of Japan (BOJ) decided to maintain its policy interest rate at 0.25% at its meeting on 19 September, as expected, while expressing a more positive outlook on domestic consumption, despite elevated external risks. The latest economic indicators showed that exports grew by 5.6% YoY in August, slowing from the previous month's 10.2% growth, while import growth decelerated from 16.6% to 2.3%. Headline inflation increased to 3.0% from 2.8% in the previous month, and core inflation edged up to 2.8% from 2.7%.
Japan's economy is gradually recovering, supported by improving domestic consumption following recovering wage growth. However, the manufacturing and export sectors remain weak. BOJ Governor Kazuo Ueda emphasized that future rate hikes will depend primarily on economic and inflation data (or data-dependence approach). Krungsri Research expects that despite an increase in inflation over the past 4 months, the BOJ will likely raise interest rates by at least 25bps by the end of 2024 to maintain financial market stability and support economic growth.
China
Although signs of a slowdown are emerging, the PBOC holds interest rates steady. On 20 September, the People’s Bank of China (PBOC) announced that the 1-year and 5-year loan prime rates (LPR) will remain at 3.35% and 3.85%, respectively, despite a 3.1% YoY fall in aggregate financing in August. Meanwhile, the onshore Yuan strengthened to a 16-month high at 7.07 per USD on 19 September. The government is considering relaxing rules on sales of non-local homebuyers and on first- and second-home purchases, which could lead to lower down payment ratios and mortgage rates.
The contraction in new credit signals a risk of further slowdown in China’s economic activity in the coming months. Weak consumption and sluggishness in the real estate sector are weighing on the economy. This underscores the need for additional stimulus measures to help the economy to grow closer to the target of around 5%. We see that US Fed’s rate cuts and the Yuan’s appreciation open door for China to ease monetary policy further, with potential rate cuts of 10-20bps in Q4. While measures in the property sector may offer some relief, new home sales are expected to decline further, and home prices may not have bottomed out for the rest of the year.
Krungsri Research maintains our 2024 GDP growth forecast at 2.4%; positive effects of stimulus measure largely offset by flood impact
Although stimulus program targeting vulnerable groups is expected to boost consumption in late 2024, the loss caused by flooding may limit its positive impact on economic growth. On 17 September, the Cabinet approved the 2024 economic stimulus program for 14.5 million state-welfare cardholders and people with disabilities (formerly the digital wallet project phase 1), providing each with THB 10,000. The funding sources of this program worth THB 145.55 bn will come from: (i) the FY2024 additional budget of THB 122 bn allocated for stimulating and strengthening the economy, and (ii) THB 23.55 bn of the central budget for emergency or necessary expenses. The objective is to improve the quality of life for low-income individuals and people with disabilities, while also injecting liquidity into the economy. The funds will be transferred to the target groups starting 25 September. The Ministry of Finance estimates that the program will contribute approximately 0.35% to GDP growth.
Krungsri Research is keeping our GDP growth forecast for 2024 at 2.4%. Although Thailand’s economy is expected to benefit from the stimulus program in the final quarter of the year, supporting purchasing power and domestic spending, the positive effects could be largely offset by the impact of the flood throughout the country. In the base-case scenario, Krungsri Research estimates that 8.6 million rai are inundated, resulting in property losses of THB 3.1 bn and crop losses of THB 43.4 bn. The total losses amount to THB 46.5 bn, or
-0.27% of GDP.
The plan to increase in the minimum wage to THB400 nationwide is still pending the outcome of the National Wage Committee meeting. According to the schedule, the Committee was supposed to consider the wage hike on September 16 and September 20. Still, no decision was reached due to an incomplete quorum, so the meeting may be postponed again. Thailand saw two wage adjustments in 2024: the first occurred on 1 January, when minimum wages were raised nationwide and split into 17 rates, ranging from THB330 to THB370 per day, an average increase of 2.37%. The second occurred on 12 April, increasing the wage to THB400 per day, but only for hotels with fewer than 50 employees in 10 tourist provinces, with specific adjustments in some areas.
Currently, 16% of the workforce now earns less than the minimum wage, down from 38.8% in 2014. However, businesses, where labor productivity growth is lower than real wage growth (or with a negative productivity-wage gap), may face increasing pressure on both profits and competitiveness. This is because rising labor costs may not align with productivity gains. Business sectors facing increasing risk from the wage increase (due to their negative productivity-wage gap) include textiles and apparel, electronics, rubber and plastics, food and beverages, automobile and transport equipment, and real estate businesses. In contrast, the agricultural and other service sectors, such as finance and trade, still have a positive productivity-wage gap, implying that the minimum wage hike may have limited impact on their business performance.
