The global economy is likely to slow down; The US economy shows signs of recession, while China's growth would remain low due to several headwinds
Indicators in major economies reflect increasing risks; The global economy is expected to weaken in 2H22. In June, Flash Composite PMIs softened for key economies, including the US (down to a 5-month low of 51.2), the Eurozone (down to the 16-month low of 51.9) and the UK (at a 15-month low of 53.1).
The global economic slowdown would accelerate. Especially, the Manufacturing PMIs, which in the US, Eurozone and the UK have dropped to near-2-year lows, given the escalated inflationary pressure and intensifying supply chain disruption from the Ukraine war and the Chinese lockdown that. Service PMIs in the US and the Eurozone fell from the previous month as consumers’ purchasing power is under pressure from rampant inflation. However, the Eurozone is more exposed to risk due to high levels of public debt on the European periphery and a worsening of the Ukraine crisis as Russia has restricted gas supplies and the EU has accepted Ukraine’s candidate status to join the EU, while confirming that military aid will continue. The rate rises by the European Central Bank (ECB) are thus likely to be less aggressive than those of the Fed.
The Fed signals to continue rates hike against inflation though the US’s recession risk is certainly possible. Speaking to Congress, Chair Powell reiterated his commitment to fight inflation ‘unconditionally’ and stated that ongoing rate hikes would be appropriate. However, the Fed Chair also admitted that the recession in the US is certainly a possibility. Despite very challenging task, the Fed is still aiming for a soft landing.
The Fed Chair’s testimony underlines the commitment to price stability, indicating that the Fed will tighten monetary policy further despite recessionary risks. The latest data point to a US slowdown, with May’s Chicago Fed National Activity Index at an 8-month low and June’s Consumer Confidence Index hitting a historic low of 50.0. Nevertheless, inflationary fires continue to burn, and at 3.1%, June’s 5-year inflation expectations were at their highest since the 2008 financial crisis. The Fed will thus have to further hike rates as it struggles to re-anchor inflationary expectations and to pull price rises back into its target range.
China faces several risks, including prolonged real estate problems; Authorities would step up targeted stimulus measures. In May, sales of residential property slipped for the 11th month and new home prices dropped 0.1% YoY, the first contraction since 2015.
China is struggling with multiple risks, including weakening labor markets, adverse impacts of global slowdown on exports, and flare-up outbreaks with the most recent lockdowns in some areas of Shenzhen and Macao. Another major problem is the prolonged slump in real estate sector due to restrictions to mitigate speculation and liquidity crunch. Given investment in accommodation accounting for 11% of GDP, this may be a more serious problem than Covid. President Jinping has reaffirmed his commitment to reach this year’s 5.5% growth target, but additional accommodative measures, including further rate cut, would be limited. The greater monetary easing would lead to more policy divergence with major countries, raising concerns over a weaker yuan and higher inflation as well as leading to higher risks in financial and real estate sectors. It is thus possible that the authorities may instead look to support the economy through targeted measures.
Thai economy has been primarily supported by growth in tourism and exports; The authorities are rolling out additional assistances with the cost of living
Measures on easing energy crisis and boosting tourism may partly help mitigate threat on economy. The cabinet has approved a new round of 3-month (July-September) measures to ease cost of living. These assistances are the extension of existing measures that will come to end and launch of additional measures, including: (i) an extension of the price caps on NGV of THB 15.59/liter and maintaining price at THB 13.62/liter for taxi drivers under the ‘Breathe together’ program; (ii) an extension to assistance to government welfare card holders (including street vendors) for the cost of cooking gas purchases; (iii) 50% subsidies for the portion of diesel prices that exceed THB 35/liter; and (iv) a call for assistance from refiners to contribute part of their profits to help soften oil prices. In addition, the cabinet has also approved additional measures to promote domestic tourism that include: (i) an expansion of phase 4 of the ‘We Travel Together’ program that adds subsidy on 1.5m room nights and extends its end date from May to October; and (ii) tax incentives for companies to arrange training, seminars or exhibitions in the second-tier tourism provinces, of which 2 times of related expense will be eligible for corporate tax deduction, while traveling to other destinations would be able to claim a tax reduction by 1.5 times of traveling cost.
The recent government responses to the cost-of-living crisis are more targeted. In addition, it is expected to alleviate only some of impacts due to the pressure from the rising inflation remains escalating alongside global oil price hikes, partly driven by the Ukraine crisis. Domestically, several items are preparing to reprice upward, including cooking gas, electricity, travel & transportation, and consumer goods (e.g., instant noodles and laundry detergent). Beyond this, the baht is weakening, which would push up import prices and thus add to cost of production. However, the pain from this will not be shared equally. Against a backdrop of high levels of household debt, weak purchasing power, together with declining real wages, the differences in typical consumption baskets of low- to middle-income groups mean that the former will tend to be more seriously affected than the latter by higher food and transportation cost from its greater proportion of spending on those categories.
The tourism and export sectors are still key drivers of the economy. Export value rose 10.5% YoY in May, up from April’s 9.9% and significantly ahead of market expectations of an increase of 6.7%. Inbound tourism is also picking up, with 521,410 arrivals recorded in May, compared to 293,350 in April. The most important markets for Thai international tourism are India, Malaysia, Singapore, the US, and the UK. For 5M22, a total of 1.31m foreign arrivals were registered.
Following the relaxation of regulations on entry to Thailand and the ending of the Test & Go scheme for fully-vaccinated travelers at the start of May, a 70% increase in arrivals was seen relative to April. The authorities are further loosening restrictions, and as of 1 July, the need to apply for a Thailand Pass will be lifted. This is expected to boost the tourism sector beyond the 20,000-25,000 daily arrivals seen at the start of June. Krungsri Research anticipates that the number of foreign arrivals may reach 8m this year (up from the prior forecast of 5.5m). Moreover, exports have also outperformed expectations, though growth may slow in the remainder of the year as trading partners’ demand is weakening. Nevertheless, exports and tourism will remain significant drivers of the economy through the rest of 2022.
