Stronger labor markets supporting US economic outlook; Eurozone growth still sluggish; Chinese economy losing momentum
US
Risk of US recession decreases after key economic figures improve. In September, retail sales grew at the weakest rate in a year at 1.74% YoY, but its month-on-month (MoM) growth improved to 0.4%, stronger than the market expectations and above the 0.1% growth in August. Meanwhile, initial jobless claims fell by the most in 3 months, by 19,000 to 241,000 in the previous week.
The risk of US recession has decreased due to improving economic indicators, such as non-farm payrolls rising by 254,000, the highest increase in 6 months, the service sector expanding at the strongest rate in 19 months, and the latest GDPNow indicating that the US economy grew by 3.4% in Q3 , up from 3% in Q2 and 1.4% in Q1. However, tight financial conditions may still put pressure on the economy, as reflected in the expected increase in debt refinancing in 2025-2026, which could affect consumer purchasing power and business income in the future. Consequently, Krungsri Research estimates that the Federal Reserve (Fed) will gradually cut interest rates, with a likelihood of further cuts in the remaining two meetings of this year, by 25 bps each time, bringing the rate down to 4.25-4.50% by the end of the year.
Eurozone
ECB cuts interest rates for the 3rd time and signals further reductions as overall economy remains fragile and inflation falls below 2%. The European Central Bank (ECB) decided to lower its key policy rate by 25 bps to 3.25%, following cuts in June and September. The ECB President stated that the latest data still supports the expectation that inflation will return to the target level within a reasonable timeframe. In addition, headline inflation slowed to 1.7% YoY in September, below the 2% target for the first time since June 2021, while core inflation slowed to 2.7%, the lowest in 5 months.
The ECB's decision to cut its policy rate in the October meeting aligns with the drop in inflation below the 2% target and the weakening economic outlook for the eurozone, as reflected by (i) the continued contraction of the manufacturing sector; (ii) reduced fiscal stimulus; (iii) low credit growth; and (iv) a still-fragile recovery in private consumption. Additionally, trade tensions with China and policy uncertainties following the US presidential election pose challenges to the eurozone's recovery. Krungsri Research expects the ECB to continue cutting rates, which would result in the policy rate falling to 3.00% by the end of the year.
China
China’s economic engines are still losing steam despite stimulus measures. GDP growth slowed from 4.7% YoY in Q2 to a 6-quarter low of 4.6% in Q3. Retail sales growth improved from 2.1% YoY in August to 3.2% in September, while fixed assets investment in the first nine months stayed flat at 3.4%. However, export growth tumbled from 8.7% to 2.4%, especially hi-tech goods (from +9.1% to -1.2%). Exports to the US and Europe grew just 2.2% and 1.3%, respectively. Real estate sector remains sluggish. New and existing home prices across 70 cities worsened from -5.7% to
-6.1% and from -8.6% to -9%, respectively. Meanwhile, the government plans to extend loans for eligible home development projects under the ‘White List’ from CNY 2.2 trn to CNY 4 trn by the end of this year.
The lates data show a further economic slowdown amid weakening services and exports, along with ongoing structural challenges, including the real estate crisis, soft labor markets, and high local government debt. The new financial and fiscal stimuli are expected to prevent a sharp slowdown rather than boosting economic growth. The government is speeding up new measures following the Politburo’s September call to ‘halt the decline’ in the real estate sector, which should help lift confidence, partially restore wealth, and, in turn, help support consumption in the coming period.
MPC cut rates for the first time in 4 years from 2.50% to 2.25% while confidence continues to decline
The Monetary Policy Committee (MPC) unexpectedly cut the policy rate, stating that it is not yet a downward cycle of interest rates. In the meeting on October 16, the MPC voted 5 to 2 to lower the policy rate from 2.50% to 2.25%. They projected Thailand's economic growth at 2.7% in 2024 and 2.9% in 2025, close to the previous forecast of 2.6% and 3.0%, respectively, supported by tourism and domestic consumption, while exports are recovering slowly. Inflation is expected to return to the target range by the end of 2024. The majority of the committee believed that the interest rate cut would help alleviate some debt burdens without hindering the debt deleveraging process amid a slowdown in credit growth. Meanwhile, two members favored keeping the rate unchanged, arguing that the current rate was still consistent with the economic and inflation outlook and would help maintain the policy's capacity to respond to future uncertainties.
The MPC’s decision to lower the policy rate this time surprised the market and Krungsri Research, as the economic outlook and inflation remained in line with the MPC's previous expectations. However, the MPC placed greater emphasis on financial stability, particularly easing household debt despite still-high level. There are also concerns about the impact of tight financial conditions on the slowing credit growth and the deterioration in credit quality, especially among SMEs and households with high debt levels. The 25-bp rate cut may help ease the debt burden, relax financial conditions, and support some real economic growth.
As for the policy rate outlook, based on the MPC statement saying that "the policy rate should remain at a neutral level consistent with economic potential and not too low to prevent long-term financial imbalances," Krungsri Research expects that the MPC will not rush to cut rates further. Instead, it is likely to adopt a wait-and-see approach, closely monitoring the debt reduction process and economic trends. If debt reduction continues and the economic situation worsens beyond expectations, the committee may cut the rate further by 1Q25 to 2%, which would be close to the neutral rate level.
Business and consumer confidence remain weak, while the government is preparing to launch additional stimulus measures. In September, the Consumer Confidence Index fell for the 7th straight month, reaching a 17-month low of 55.3 from 56.5 in August. Likewise, the Thai Industries Sentiment Index (TISI) also dropped for the 2nd straight month, to a 27-month low of 87.1 in September from 87.7 in August.
A slow recovery in business and consumer sentiment is partly affected by temporary factors, especially flooding in several northern and northeastern provinces, which has disrupted agricultural and industrial production, as well as local purchasing power in affected areas. Looking ahead, sentiment may benefit to some extent from the THB 10,000 cash handouts given to vulnerable groups at the end of September, though this is likely to have only a short-term impact on spending. Meanwhile, the government is now considering further stimulus measures such as subsidies for tourism and domestic spending, as well as cash handouts for those previously registered under the digital wallet program. If implemented effectively, these measures would likely help improve confidence and drive economic growth in the next period.
