Intensifying trade war increases risks of economic slowdown and rising inflation
US
Likelihood of rate cut in March remains uncertain amid more signs of economic slowdown. Consumer Confidence Index fell to an 8-month low of 98.3 in February. This aligns with a slowdown in GDP growth to a 2.3% annualized rate in 4Q24 from 3.1% in 3Q24. Meanwhile, January PCE inflation slowed to 2.5% YoY from 2.6% in the previous month, and core PCE inflation eased to 2.6% from 2.9%.
Amid concerns over Donald Trump’s tariff policies, which pose upside risks to US import costs, markets have scaled back expectations for a Fed rate cut at the March 18-19 meeting. However, tight financial conditions (such as rising corporate debt refinancing under high interest rates and highest delinquency rates on credit cards and personal loans in over a decade), coupled with the impact of trade policies and the deportation of illegal immigrants, all pose downside risks to economic growth prospects, which could prompt the Fed to cut interest rates 2-3 times this year.
Eurozone
Eurozone economy may grow at a sluggish pace amid heightened trade war risks. In Germany’s general election, the CDU/CSU alliance secured victory with 28.6% of the vote, followed by the AfD (20.8%), SPD (16.4%), and Greens (11.6%). The coalition government formation may take approximately two months. While the election result raises hopes for an economic recovery through stimulus measures, there remain structural problems in the manufacturing sector, an aging population, and the constraints of a coalition government, which could hinder economic growth in the period ahead.
The Eurozone economy remains weak amid a prolonged manufacturing contraction, low confidence, and a potential escalation of trade tensions. US Policies such as reciprocal tariffs and threats to impose a 25% tariff on cars and other goods could trigger retaliatory actions from the EU, which may affect the region’s economic growth—especially in export-dependent nations like Germany. Given these conditions, Krungsri Research expects the ECB to cut its deposit facility rate by 25bps to 2.50% at meeting on 6 March.
China
China’s economy lacks support from consumption and investment. More stimuli are expected to be announced at ‘Two Sessions’ meeting. The official Manufacturing PMI, New Orders Index, and Non-Manufacturing PMI all rose in February (as shown in the figure). Meanwhile, the average price of new and second-hand homes across 70 cities declined at a slower pace, from -5.7% YoY in December to -5.4% in January and from -8.1% to -7.8%, respectively.
China’s economy still fluctuates following cyclical factors and is under pressure from excess supply in the manufacturing and real estate sectors, along with risks from trade wars. We expect China to announce additional stimuli at the ‘Two Sessions’ meeting, in early March. Such measures would prioritize supporting consumption and investment and strengthening the manufacturing sectors. Meanwhile, the government is likely to keep its 2025 GDP growth target at around 5% but may increase the fiscal deficit from 3% of GDP to 4% to align with more stimulus measures expected to come this year.
Krungsri Research forecasts Thai economy to grow 2.7% in 2025 from 2.5% 2024; Policy interest rate expected to remain at 2.0% for the rest of the year
Thai economy supported by both domestic and external demand in January. Krungsri Research expected 2025 GDP growth to 2.7%. The BOT reported that, in January, the overall economy was supported by the tourism recovery, with increases in both the number of and revenues from foreign tourists. Private consumption index improved amid supports from stimulus measures, aligning with trade activities, industrial production, and private investment. Merchandise exports increased, led by growth in a few categories. The government’s current and capital budget expenditures also rose in the month..
The economy would be supported by the tourism recovery and temporary gains from stimulus measures early this year. For the whole of 2025, Krungsri Research forecasts economic growth of 2.7%, up slightly from 2.5% in 2024. The key drivers for growth this year include: (i) a recovery in the tourism sector, with an estimated 38 mn foreign tourist arrivals this year, though still below pre-COVID levels; (ii) normalization of government’s budget expenditures after long delays last year; (iii) a rebound in private investment with applications for the BOI incentives in terms of investment value reaching a decade high last year though structural problems in many industries may pose challenges. However, two other key drivers are expected to see a slowdown this year: (i) Export growth is projected to slow down to 2.7% in 2025 from 5.8% in 2024 amid rising trade protectionism and domestic structural problems; (ii) Private consumption growth is expected to decelerate from 4.4% last year to 2.8% this year, in line with overall economic growth. Stimulus measures may have limited positive impacts, as seen in the THB10,000 cash handout program (Phase 1) in 4Q24. In addition, private consumption growth may be undermined by sluggish real income growth and persistently high household debt levels.
MPC cuts policy rate by 25bps but rules out easing cycle, expected to hold the rate at 2.0% for the rest of the year. The Monetary Policy Committee (MPC) on February 26 voted 6 to 1 to cut the policy interest rate by 25bps to 2.0%. The decision was made to (i) align financial conditions with an economy that is expected to grow weaker than anticipated given structural challenges in the industrial sector and increased competition from foreign goods; and (ii) to better cope with increasing downside risks to the economy amid uncertain trade policies of major economies.
The MPC’s rate cut aligns with Krungsri Research’s expectation but came as a surprise to the market. The Reuters survey reported that 16 out of 26 research houses had expected the MPC to hold the rate steady. Although the policy rate was cut, the MPC's statement did not signal an easing cycle for the following reasons: (i) The committee deems that the 2% policy rate is consistent with the latest assessment of the economic outlook and “remains robust to risks going forward.”; (ii) There are no signs of impending deflation and medium-term inflation projections remain within the target range; and (iii) The interest rate cut alone should not be viewed as a major tool for boosting economic growth, premised on the low economic growth stemming from structural headwinds. Given these factors, Krungsri Research expects the MPC to maintain the policy rate at 2.0% for the remainder of the year.
