Uncertainty over future US trade policy may slow policy moves by central banks; Chinese stimulus having only limited effects on growth
US
The US economy remains resilient, and uncertainty surrounding economic policies may prompt the Fed to delay rate cuts. Fed chair Powell has said that the economy is expanding and labor markets are healthy, but inflation remains above the 2% target and so the Fed will take a more cautious approach to setting the course for monetary policy. Powell expects inflation to gradually decline toward the long-term target. Additionally, the Fed plans to assess the impact of the new government’s policies before making monetary policy adjustments. In October, headline inflation stood at 2.6% YoY, while core inflation was 3.3%. Retail sales rose by 0.4% MoM, above market expectations of 0.3%.
Trump’s victory and the Republican clean sweep in Congress has helped to raise hopes for US economic expansion. However, concerns over inflation and other risks are rising amid his policies, in particular the promise to raise tariffs. Analysis by Krungsri Research shows that if tariffs are raised to 60% on Chinese goods and 20% on goods from elsewhere, this will reduce US GDP by -0.97% from baseline. The Fed may thus hold back on future rate cuts as officials wait to assess the impacts of the new administration’s policies. If inflation accelerates, it could influence the Fed’s rate-cut trajectory next year, potentially resulting in smaller or slower cuts than the market anticipates.
Japan
Stimulus measures, wage hikes, and tourism recovery are boosting the economy, but growth remains constrained by sluggish manufacturing activity and exports. Japan’s GDP expanded by 0.2% QoQ in Q3, marking two consecutive quarters of growth, primarily supported by consumer spending. Recently, the Japanese government unveiled an economic stimulus plan focusing on developing and promoting the semiconductor and artificial intelligence (AI) industries, with a budget target of up to JPY10 trn (approximately USD65 bn) by fiscal year 2030. Additionally, Prime Minister Fumio Kishida plans to meet with business representatives and labor unions this month to stimulate domestic consumption.
Despite ongoing challenges from weak manufacturing and slower exports, Japan’s economy is expected to recover gradually next year. This recovery will be supported by rising wages, growing tourism, and government measures to stimulate the economy and encourage investment. However, given the subdued growth outlook and uncertainties surrounding US economic and trade policies, Krungsri Research expects that the Bank of Japan (BOJ) may adopt a wait-and-see stance. There is a possibility of a 25-bp policy rate hike to 0.50% by the first quarter of 2025.
China
China’s stimulus programs boost consumption but there is a slow recovery in manufacturing, investment, and real estate sector. In October, retail sales grew at the fastest rate since February (+4.8% YoY vs +3.2% in September). However, the outlook for other key economic drivers is less positive, with industrial output softening slightly (+5.3% vs +5.4%), new home prices down for the 16th straight month (-5.9% vs -5.8%), investment in real estate continuing to slide (-10.3% over 10M24 vs -10.1% in 9M24), and growth in fixed assets investment broadly flat (+3.4%).
The latest round of stimulus spending is the largest since the pandemic, but signs of recovery remain unclear. (i) Consumption may see a temporary rebound on a combination of stimulus package, public holidays, and spending over the Singles Day event, but more than 70% of household wealth is in real estate, which has yet to recover. (ii) Any positive effects from efforts to revive property markets will take some time to show up due to the significant glut of unsold units. (iii) Most policies are largely focused on addressing past problems rather than stimulating current expenditure (e.g., CNY 10trn to help ease local government debts and tax cuts to support the real estate). Moreover, worsening trade tensions will drag on exports, which recently have been the major driver of Chinese growth.
Krungsri Research plans to raise 2024 economic growth forecast, following stronger-than-expected 3Q24 GDP and improving confidence.
3Q24 GDP grew 3.0% YoY and 1.2% QoQ, exceeding expectations. Full-year growth likely above Krungsri Research’s 2.4% forecast. The NESDC reported that the Thai economy in 3Q24 expanded by 3.0% YoY (above market expectation of 2.4% and Krungsri Research’s estimation of 2.3% YoY), compared to a 2.2% expansion in 2Q24. Supportive factors included (i) accelerated government spending, especially public investment (+25.9%) which turned positive growth for the first time in 6 quarters, (ii) a rebound in exports of goods (+8.3%) due to demand for higher demand for some sectors and weaker Thai baht (iii) a further recovery in exports of services (+21.9%) due to growing tourism activity, and (iii) continued expansion in private consumption (+3.4%) despite a slowdown from the previous quarter. However, private investment continued to contract (-2.5%). The NESDC has revised up its 2024 GDP growth forecast to 2.6% (from the previous 2.5%) and expected 2025 growth at 2.3-3.3%.
The NESDC reported that the seasonally adjusted GDP in 3Q24 expanded by 1.2% QoQ sa, above the market expectations and Krungsri Research’s forecasts of 0.8% and 0.7%, respectively, and higher than the 0.8% growth in 2Q24. For the first 9 months of 2024, Thai GDP grew by 2.3% YoY.
Krungsri Research is preparing to raise our 2024 economic growth forecast from the previous estimate of 2.4%. The economic growth in the final quarter of this year is expected to pick up from 3Q24 due to the following factors: (i) the momentum of government spending, which is expected to continue to speed up; (ii) the tourism sector entering the high season, which will support the number of foreign tourists this year to rise to 35.6 million (from 28.8 million in the first 10 months of the year); (iii) economic stimulus measures through the 10,000-baht cash handout project for vulnerable groups and measures to promote domestic tourism, as well as the government’s plan to consider additional stimulus measures for later this year and into next year; and (iv) last year’s low base with GDP growth of +1.7% YoY in 4Q23 due to a delay in approval of Budget Act.
Consumer and business sentiment shows signs of recovery in early 4Q24. The government is considering additional stimulus program late this year. The clearing of flood waters, the THB 10,000 payments to low-income earners, support for the tourism sector, and reductions to loan rates by commercial banks following the Bank of Thailand’s 25-bp cut in the policy rate to 2.25% all have lifted sentiment. In October, the Consumer Confidence Index edged up from 55.3 to 56.0 in September, its first improvement in 8 months. Similarly, the Thai Industries Sentiment Index climbed from 87.1 to 89.1.
While firmer sentiment reflects an improving outlook for the economy through 4Q24, the situation remains somewhat fragile. Despite recent improvements, the Consumer Confidence Index is still far below the 2019 pre-Covid average of 75.5. In addition, growth momentum is largely coming from stimulus measures that are focused on boosting short-term spending. Recently, the government has planned to make further THB 10,000 payments to elderly individuals registered under the Digital Wallet scheme.
Nonetheless, sustained growth in consumption and a recovery in industrial output will face a range of headwinds in the form of domestic structural issues such as (i) the high burden of household debt, which is dragging on purchasing power, (ii) the declining competitiveness of some key industries, and (iii) low levels of domestic investment. In addition, external risk has risen, especially from the surge in uncertainty over the direction of future US trade policy, which may then add to volatility for trade and economies worldwide, including Thailand.
