Strong labor markets raise chance of soft-landing for US economy; Eurozone facing increased risk; China’s economy continues to slow down
US
US recession risk is declining on better-than-expected employment data and an expanding service sector. In September, non-farm payrolls expanded by 254,000, up from a 159,000 rise in August, the unemployment rate slipped to 4.1% from 4.2%, and growth in average hourly wages inched up to 4.0% YoY from 3.9%. Also, the Job Openings increased to 8.04 mn in August from 7.71 mn in July. Although the Manufacturing PMI remained in contraction at 47.2 in September, the Services PMI expanded to 54.9, the highest level in 19 months.
Despite a worsening situation for manufacturing in September, services sector continues to expand well. Also, the stronger-than-expected employment data reinforces the prospect of the US achieving a soft-landing. Nevertheless, escalating geopolitical tensions in the Middle East, following Iran’s missile attack on Israel on Tuesday, could potentially lead to higher crude oil prices and inflation in the coming period, adding to the risks and uncertainties surrounding the economic and inflation outlook. Krungsri Research therefore expects that the Fed will move forward with a gradual rate cuts, with 2 more reductions of 25 bps each expected this year, bringing US Fed Funds rate to 4.25-4.50% by the end of this year.
Eurozone
Eurozone growth momentum is slowing, and inflation is cooling, providing space for the ECB to cut rates to 3.0% by end-2024. Headline inflation eased to 1.8% YoY in September from 2.2% in August, while core inflation softened to 2.7% from 2.8%. The Manufacturing PMI continued to contract, falling to 45, while the Services PMI slowed for the third consecutive month to 54.9. Additionally, the European Union (EU) voted to impose a 45% tariff on electric vehicles (EVs) imported from China, which will be in effect for five years. However, the European Commission (EC) remains open to negotiations with China to resolve this issue, particularly regarding the implementation of minimum import prices for Chinese cars and setting import quotas.
The third consecutive month of declining activity in the services sector, along with a sharper contraction in manufacturing in September (hitting a 7-month low), reinforces the picture of a fragile and weak economic recovery in the Eurozone. This aligns with the more pronounced drop in September’s inflation rate, led by headline inflation falling below 2% for the first time since June 2021, and core inflation slowing for the third straight month to 2.7%. Given this environment, Krungsri Research expects that the ECB will make 2 more rate cuts this year of 25 bps each, bringing the benchmark deposit rate down to 3.00% by end-2024.
China
China’s economy continues to slow, signaling the need for further stimulus measures. In September, the official manufacturing PMI shrank for the 5th straight month at 49.8, while the non-manufacturing PMI fell further to 50. Caixin also showed the manufacturing PMI turning a contraction at 49.3, a 15-month low, and the services PMI tumbling from 51.6 to 50.3. As for the real estate sector, new home sales by the top 100 developers contracted deeper from -26.8% YoY to -37.7%. Recently, the government allowed existing mortgage holders to renegotiate interest rates starting November 1, and major cities (e.g., Guangzhou) removed homebuyer eligibility checks and lifted property ownership limits.
The ongoing economic slowdown points to the insufficient effectiveness of recent stimulus measures. Restoring wealth and confidence should be a key to improve the situation, particularly by (i) expanding fiscal stimulus in terms of scale and scope—the government is considering a CNY1 trn bond issuance to boost consumption; (ii) stabilizing housing prices—if easing restrictions expand into other cities, the market is expected to become more active, and prices may bottom out in the beginning of 2025 at the earliest; (iii) maintaining the recovery momentum on the stock market, which remains 8.3% below its 2021 peak; and (iv) reducing youth unemployment, which was still high at 18.8% in August.
Krungsri Research is keeping our 2024 GDP forecast at 2.4%; MPC expected to keep rates steady through 2024 but rate cuts are possible in 1H25.
The Thai economy in August was mainly driven by exports, while recovery in other sectors remained fragile. The Bank of Thailand reported that overall economic activity in August remained steady. Exports (ex. gold) grew 3.6% MoM sa in the month, partly due to temporary factors related to shortages of agricultural and agro-processing goods in overseas markets, including rising exports of rubber to India. Meanwhile, the tourism sector slowed down in line with a decrease in foreign tourist arrivals (-6.7%), especially from China and Malaysia, following recent strong growth. Private consumption saw a slight increase (+0.5%), led by non-durable goods. However, private investment declined (-3.3%) due to reduced investment in machinery and equipment. Manufacturing production contracted again (-3.0%) after accelerating in the prior month, as inventories in several categories remained high.
Krungsri Research expects that, despite a slowdown in Q3, the domestic spending may improve in the final quarter of the year, supported by the government’s transfer of THB 10,000 each to low-income earners in late September, with a total budget of THB 145 bn. This measure should add 0.2-0.3% to GDP this year. However, we are leaving our forecast of 2024 GDP growth unchanged at 2.4%, as the positive effects of the stimulus measure may be largely offset by the impacts of flooding, which caused damage across many areas of the country. In our base case, we expects around 8.6mn rai to be affected by flooding, causing damage to agricultural output and other assets amounting to THB 46.5 bn, or approximately -0.27% of GDP. In the worst-case scenario, if the affected area increases to 11 mn rai, the total losses would be around THB 59.5 bn, or -0.34% of GDP.
The MPC is expected to keep the policy rate steady in October, but rate cuts are possible in 1H25. The Finance Minister revealed that after discussing with the Governor of the Bank of Thailand on key issues, including inflation targets, household debt solutions, and the overall economic outlook, he reaffirmed his support for the Monetary Policy Committee’s (MPC) role in determining interest rates. At the recent MPC meeting in August, the committee voted 6:1 to maintain the policy rate at 2.50%, as it aligns with the economy’s potential growth, while ensuring economic and financial stability. The next meeting of the MPC will be held on Wednesday, October 16, the fifth meeting this year.
We still expected the MPC to maintain the policy rate at 2.50% for the rest of this year, supported by the following factors: (i) continued economic recovery, with GDP growth projected to rise to 3.6% in Q4 from an estimated 2.3% in Q3, driven by growth of the tourism sector and a rebound in public spending after earlier delays; (ii) the government’s recent cash transfer to vulnerable group, which will help to boost consumption and domestic economic activity; and (iii) an expected increase in inflation, from the current 0.61% in September, towards the BOT’s target range of 1-3% by the end of 2024. However, we expected the MPC to cut the policy rate twice, by 25 bps each, in the first half of 2025 premised on: (i) tighter financial conditions from rising NPLs, which will gradually affect the real economy; (ii) the fading positive effects of fiscal stimulus measures; and (iii) narrowing interest-rate differentials between the US and Thailand, given the US Fed’s further rate cuts and growing peer pressure (as other central banks in the region will follow the Fed’s moves). Premise on the above, Thailand’s policy rate is expected to drop to 2.00% by the end of 2025.
