Slowing economies in the US and Eurozone open the door to 2025 rate cuts while China’s growth remains weak despite some improvement.
US
With the economy heading for a soft landing, the US is expected to cut interest rates at a gradual pace. In November, the Consumer Price Index (CPI) rose by 2.7% YoY, up slightly from 2.6% in October. The core CPI remained flat at 3.3%. The Producer Price Index (PPI) exceeded expectations. However, service sector prices showed a marked slowdown and import prices rose only slightly amid a stronger US dollar. Elsewhere, the US announced hikes in tariffs on imports from China of solar cells and polysilicon to 50% and tungsten products to 25%, effective from 1 January 2025.
US economic and inflation data continue to support the outlook for a soft landing but may dampen expectations for monetary policy easing next year. This is reflected in: (i) the strength of the ISM Services PMI; (ii) expansion in retail sales and the rise in consumer sentiment to an 8-month high; and (iii) potential risks from Donald Trump's economic and trade policies that could add upward pressure on inflation. Nonetheless, cooling labor markets, weaker wage growth, and the rising delinquency rates on consumer loans and credit cards are expected to weigh on economic activity, which should allow the US to lower interest rates further. We therefore expect that the Fed will cut interest rates by 25 bps to a range of 4.25-4.50% at its December 17-18 meeting, followed by a projected 25 bps reduction per quarter in 2025.
Europe
The ECB signals rate cuts to continue in 2025 amid slowing economic growth and inflation. The European Central Bank (ECB) has lowered its key policy rate by 25 bps to 3.0% and hinted at the possibility of further reductions. The central bank has also revised down its economic growth forecast for the Eurozone and expected inflation to fall below 2% in 2025. Additionally, political concerns within the EU have escalated following the no-confidence vote against French Prime Minister Michel Barnier, forcing him to step down after just three months in office.
Although the ECB expected Eurozone’s economic growth to improve from 0.7% in 2024 to 1.1% in 2025, the outlook remains weak and uncertain. (i) Manufacturing and services both contracted further in November, with the Manufacturing PMI declining to 45.2 and the Services PMI contracting for the first time in 9 months; (ii) Private-sector sentiment remains weak, and this may drag on consumption and investment; (iii) Exports may be affected by rising US-China trade tensions; and (iv) The collapse in the popularity of ruling parties in France and Germany may lead to these parliaments being dissolved next year. This could undermine political stability and the ability to implement policies effectively. We therefore see rate cuts continuing through 2025, falling to 2.00% in mid-year.
China
The Chinese economy remains fragile despite some positive signs from government stimulus measures. The official Manufacturing PMI expanded for the second straight month, rising from 50.1 in October to 50.3 in November. The new orders index rose from 50 to 50.8, in line with the rise in new export orders from 47.3 to 48.1. The non-manufacturing PMI also edged up from 50 to 50.2. Meanwhile, the Caixin Manufacturing PMI accelerated from 50.3 to 51.5, though the Services PMI slipped from 52 to 51.5. Export growth decelerated from 12.7% in October to 6.7% in November, but exports to the US remained flat at 8%. Headline inflation remained low at 0.2%, its lowest in six months, while producer prices improved slightly from -2.9% to -2.5%.
The latest economic data shows a partial recovery amid oversupply in the manufacturing and real estate sectors, with growth expected to slow from 4.8% in 2024 to 4.5% in 2025. Recently, the government has signaled to shift from “prudent” to “moderately loose” monetary and fiscal policies in 2025, along with efforts to stabilize the property market. The government is also considering to allow further yuan depreciation to mitigate the impact of US tariff hikes. While these actions may help to support growth and ease external risks, they could add to the government debt, potentially undermining economic stability in the next period.
Despite improving confidence and debt-relief measures, private consumption growth is expected to soften in 2025
Consumer confidence has bottomed out, but growth momentum remains fragile. Private consumption is expected to grow at a gradual pace. November’s Consumer Confidence Index reading strengthened from 56.0 to 56.9, making its second month of gains due to fading impacts of floods in the North and Northeast, the government’s THB 10,000 payments to vulnerable groups, and the measure to boost tourism activities during the high season.
Although consumer confidence, which had reached its lowest point in September (55.3), showed a positive sign for the economic outlook moving forward, growth momentum remains somewhat fragile. This is reflected in the still-low Consumer Confidence Index compared to the pre-COVID average (75.5 in 2019). Moreover, much of the recovery is driven by short-term economic stimulus measures focused on boosting spending, while purchasing power remains weak. Real wages in 2024 increased by only 3.2% from pre-COVID levels (2019), or about 0.6% per year. Additionally, the recovery of real wages varies across sectors, with the manufacturing sector showing a slower recovery and still below pre-COVID levels. Meanwhile, agricultural income is expected to soften in 2025, in line with a forecast decline in prices.
Given the above, we expected private consumption growth at 3% in 2025, compared to 4.8% in 2024. The growth is decelerating to close to overall economic growth after posting a sharp expansion following government stimulus measures, the release of pent-up demand, and the post-pandemic rebound in the tourism sector.
Thailand has launched a household debt relief program aimed at helping vulnerable groups, but it will take time to resolve the problem. The authorities have unveiled its ‘You Fight, We Help’ debt-relief program, which has two main strands: (i) the ‘Pay direct, keep your assets’ scheme offers to those with outstanding home, automobile and smaller business loans. They will get a 3-year moratorium on interest payments alongside cuts to installments, which will be used to pay off the outstanding principal. (ii) The ‘Pay, close, complete’ scheme allows those with NPLs with a value of up to THB 5,000 each to pay these off and to declare the debt cleared (see table for details). Registration for the program will be open between 12 December 2024, and 28 February 2025.
The latest measures to tackle household debt problem come in the form of temporary measures targeting at-risk smaller household and SME borrowers that will allow these to maintain possession of their assets (e.g., home, car, or place of work). Some 1.9m individuals with 2.1m accounts worth THB 890bn will be eligible for this help, though this is just 5.5% of total household debt. This will help to reduce some household debts (which is now at almost 90% of GDP) and to mitigate credit risk in some segments, especially for auto loans, where the proportion of NPLs threatens to escalate. As of 3Q24, auto loans with a significant increase in credit risk (SICR or stage 2: the debt is overdue for more than 30 days but less than 90 day) had risen to 15.7% of total loans, up from 7.4% in 2019.
The ‘You Fight, We Help’ program should help to remove some of the pressure on borrowers, but solving the deep structural problems related to Thailand’s high level of household debt will require long-term solutions such as a policy to raise income and increase productivity in an effort to avoid the vicious cycle of debt and debt trap.