With economies slowing and worries over inflation receding, major central banks are preparing to slow the current round of monetary tightening
US
Inflationary pressures are abating in the US, potentially offering the Fed to end its cycle of interest rate hike in 2H23. In June, headline inflation edged down from 3.1% in May to a 2-year low of 3.0% YoY, core inflation was down from 5.0% to 4.8%, headline Producer Price Index (PPI) slumped from 0.9% to 0.1%, and core PPI slipped from 2.6% to 2.4%. Alongside this, the Consumer Confidence Index rose to 72.6, its highest since September 2021.
The US economy is slowing, but not as sharply as in previous recessions. Thus, employment data remains firm, consumer sentiment is improving, and other economic indicators have remained stronger than expected, and this is reducing the likelihood of a recession in the latter half of 2023. However, given the overall cooling of the economy, softening labor markets, a slowing service sector, easing inflationary pressures, and the fact that real interest rates are now positive, we see the Fed hiking rates just once more this year, bringing the Fed Funds Rate up to 5.25-5.50%.
Eurozone
Tightening monetary policy is dragging on the Eurozone, and so the economy is expected to have contracted again in Q2. The ZEW Economic Sentiment Index slipped from -10.0 in June to -12.2 in July, its 3rd month in negative territory, while May’s Manufacturing Production Index flipped from growth of 0.2% to a contraction of 2.2% YoY. This was in line with May’s 2.3% fall in exports and the 12.8% slump in imports, the worst print in almost 2 years and a reflection of worsening domestic economic conditions.
The effects of tightening monetary policy are becoming evident in data on domestic consumption and investment, as well as in slowing property markets, though softening energy prices and tight labor markets will help to head off the risk of a severe slowdown. Given this, continuing worries over inflation, and comments made by the European Central Bank (ECB) at its last meeting regarding the likely direction of monetary policy, we expect that the ECB will raise deposit rates from their current 3.50% to 3.75-4.00% as it tries to establish price stability and pull inflation back towards the mid-term target of 2%.
China
With the domestic rebound weakening and export markets slowing faster than expected, the Chinese economy is coming under pressure. Exports slumped 12.4% YoY in June, the sharpest fall since February 2020 and worse than both May’s 7.5% contraction and market expectations of a fall of 9.5%. Overseas markets also performed badly, with falling exports to the US (-23.7%), the EU (-12.9%), and the ASEAN (-16.9%), though those to Russia moved against the trend to jump 90.9%. For all of 1H23, exports slipped 3.2%.
Chinese growth is slowing under pressure from weaker overseas demand and the dissipation of the boost initially provided by the country’s reopening, and this is then reflected in: (i) import contraction accelerating from -4.5% to -6.8% in June; (ii) headline and core inflation easing to an over-2-year low of zero and 0.4%, respectively; and (iii) historically weak growth in total social financing (broad measure of credit and liquidity in the economy) of 9.0% in June, despite lower interest rates. Policy space for new stimulus measures and their effectiveness will be limited because they could risk amplifying existing problems associated with excess supply in the real estate and other industries, and high debt levels at local governments and the resulting impact on the financial system.
FDI applications for BOI privileges grew solidly through the first half of 2023, but political uncertainty may drag on sentiment
Applications for investment support jumped 70% in 1H23, with FDI more than doubling in the period. The Board of Investment (BOI) reports that in 1H23, applications for investment support were received for 891 projects with investment value of THB 364.42bn, increases of respectively 18% and 70% YoY. Of this, 464 applications worth THB 286.93bn (or 79% of the total by value) were for projects in government-targeted industries, with the most popular of these being electronics & electrical appliances, agriculture & food processing, and autos & auto parts. At the same time, 507 projects were foreign direct investment (FDI) (up 33%), and these had investment value of THB 304.04bn (up 141%). China was the most important source of FDI, directing THB 61.50bn of funds to 132 projects, many in the electronics industry. China was followed in importance by Singapore and Japan.
In 1H23, Thailand sees positive signs from rising BOI applications, especially from the doubling in FDI. Much of this went into targeted industries, namely the production of electronics and EV parts. The BOI has thus pointed out that although the global economy is choppy and geopolitical tensions are worsening, investor interest in Thailand remains firm thanks to the country’s strength in infrastructure and supply chains. The 2023 IMD report also shows that Thailand’s competitiveness is improving, and the country has moved up 3 places in the international ranking to 30th. Thailand’s performance in some subcategories -- international investment -- jumped 11 spots to 22nd due to the large number of foreign companies investing in Thailand. However, the current uncertainty over the political situation and the appointment of a new government may affect sentiment, and investments may slow as investors wait to see how the situation develops and what policies the incoming government will pursue. If delays to establishing a new government extend over the next 1-2 months or demonstrations are protracted, this may weigh on the economy, and the outlook may then worsen from our earlier prediction of annual growth of 3.3% for 2023.
Political turmoil may begin to undercut sentiment and drag on growth. In June, the Consumer Confidence Index (CCI) rose from 55.7 in May to 56.7. This was the 13th consecutive month of increases and so sentiment is now at a 40-month high (i.e., its highest since March 2020). Consumer confidence has been lifted by the rapid recovery of the tourism sector, which has helped to lift regional economic activity and to inject additional money into the economy overall. In addition, the outlook has improved on softening energy prices, which has then reduced worries over the rising cost of living. Nevertheless, consumers are increasingly worried over the uncertain political outlook, while the export sector may come under threat from a slowdown in the global economy.
Although consumer sentiment is trending upwards, it remains significantly under-strength relative to the pre-Covid-19 period (in 2019, the CCI averaged 75.5). Through 2H23, the economy will also come under increased pressure from a lack of clarity over when a new government will be in place. On 13 July, Pita Limjaroenrat, the Move Forward candidate for PM, failed to secure a majority in the vote to appoint a new prime minister and it is not clear whether he will be any more successful in the second round of voting, due to take place on 19 July. At present, the Budget Bureau has not altered the timeline for moving forward with the FY2024 budget, though this assumes that a PM will be elected in July and a cabinet will be in place in August. The Budget Bureau is thus set to present a timetable for the FY2024 budget to the cabinet in the 2nd week of August. This would then be followed by a first reading in parliament in December, and, following a 6-month delay, disbursements might begin in March 2024.
