Cooling inflation will support mid-year rate cuts by the Fed, while China is benefiting from ongoing growth in services sector
US
Signs of a slowdown are growing but the US economy remains strong. Revised estimates of 4Q23 GDP growth have been cut to 3.2% QoQ SAAR from the initial 3.3%, and this then brings GDP growth at 2.5% for the whole year. In February, the ISM Manufacturing PMI dropped from 49.1 in January to 47.8, marking 16th consecutive month of contraction, while consumer confidence also dropped to 106.7, its first decline in 3 months. Additionally, January’s headline PCE dropped from 2.6% YoY to 2.4% and core PCE was down to 2.8% from 2.9% in month earlier, but February’s read of 1-year expected inflation rose from 2.9% to 3.0% a month before.
Although the Manufacturing PMI remains weak, orders for durable goods have undergone their sharpest monthly fall since April 2020, and consumer sentiment is beginning to soften, there is a low risk that the US will slip into recession. Also, the decline in inflation is beginning to slow. We therefore expect that the Fed may start the next cycle of rate cuts in mid-2024. Looking forward, decision makers may be influenced by increasing uncertainty in 2H24, which may rise on: (i) the end-of-year presidential election; (ii) the Russia-Ukraine war; (iii) fighting in the Red Sea; and (iv) accelerating deglobalization. In addition, In addition, there are two deadlines for the US to approve the budget bill by 8 March and 22 March to avert the government shutdown.
Japan
With the economic recession in 4Q23 and inflation likely to dip below 2% in the next several months, the outlook for Japan’s interest rate policy is unclear. In January, headline inflation dropped from 2.6% YoY to 2.2% and core inflation went down from 2.3% to 2.0%. Industrial output contracted by 7.5% MoM (against the forecast -6.7%). The unemployment rate and jobs-to-application ratio both stayed flat at respectively 2.4% and 1.27.
Although signs of recovery in the export and tourism sectors strengthened in 4Q23, domestic consumption has come under pressure from inflation that has outpaced the rise in income (i.e., real wages have fallen), and this will weigh on the Japanese economy through 1H24. Moreover, inflation continues to slow, and this should dip below 2% in the next 1-2 months. Given this, we see the Bank of Japan likely confounding market expectations by delaying rate hikes, possibly until wages grow and inflation returns to the 2.0% target over the long term.
China
Chinese services sector continue to expand, but the contraction in real estate is accelerating. The official manufacturing PMI edged down from 49.2 in January to 49.1 in February, with new export orders slumping from 47.2 to 46.3, while the private Caixin manufacturing PMI edged up from 50.8 to 50.9. However, the non-manufacturing PMI rose from 50.7 to 51.4, mirrored by the increase of 19% in travel and 7.7% in spending over the first 8 days of Chinese New Year relative to 2019. Commercial banks have also released over CNY 200bn in credit to support property projects under the government Whitelist (as of 28 February). Still, home sales by the 100 largest developers in February contracted 20.9% MoM, and on an annual basis, these are now down 60%, a decline from January’s 34.2%.
The Chinese New Year boost to services sector could help alleviate deflationary pressures in February, while data on manufacturing and real estate might be impacted by the holidays and the temporary halt to production lines. Meanwhile, the effects on project completion rates of the release of new credit to developers will take some time to become evident. Overall, the strength of the service sector will remain an important driver of the economy, with 1Q24 economic growth expected to be moderate at 4.2% YoY vs 5.2% in 4Q23.
The Thai economy continues to grow at the start of 2024, though only slowly. BOT issued regulations to better support debt relief in specialized financial institutions.
The economic conditions continued to improve in January, but growth remains sluggish. The Bank of Thailand (BOT) reports that in January, the economy benefited from growing private consumption and service sector, which has itself benefited from continuing recovery in the tourism industry. Thus, for the month, seasonally adjusted tourist arrivals and receipts rose 1.5% and +17.1% MoM sa respectively. Export value was also up +0.7% MoM sa, helped in particular by improvements in overseas demand for rice, electronics, and chemical products. Private investment also improved slightly on stronger imports of capital goods and increased investment in plant and machinery, but delays to the 2024 budget have meant that central government spending (both regular outgoings and investments) has continued to contract.
Through the start of 2024, the economy continues to be driven by private consumption and the strength of the tourism sector, these having benefited from the government’s Easy-E-Receipt scheme and the introduction of Visa-Free travel for arrivals from some key countries. Meanwhile, public-sector spending is expected to contract through the first quarter, and this will continue to drag on the overall economy. However, the government has recently approved a plan to accelerate the passing of the annual Budget Bill, and this should be sooner the previous plan by around two weeks. The process should therefore be completed by 3 April, allowing government disbursements to increase, and these will thus have a more prominent role driving growth from 2Q24 onwards.
The BOT has rolled out measures to support the long-term management of NPLs accumulating in specialized financial institutions. The BOT has said that following discussions with the Ministry of Finance, it has become evident that additional support is needed by borrowers with NPLs owed to specialized financial institutions (SFIs). The BOT has thus approved measures to allow SFIs and asset management companies (AMCs) to form a joint venture asset management company (JVAMC) to manage these debts. The JVAMC will have a 15-year license and will begin operating by 31 December 2024.
The impacts of the pandemic on the economy were wide and deep, and these continue to show up in the number of NPLs contained in the financial system and the subsequent need to extend additional help to debtors. In 2022, the BOT issued guidelines on the formation of a JVAMC to help debtors in commercial banks and to manage NPLs held by these. However, the value of NPLs held by SFIs is rising, and the latest data shows that for NPLs impacted by Covid-19 (code 21), 70% are held by SFIs, 20% by non-banks, and just 10% by commercial banks. Moreover, SFI’s NPLs have increased to THB294bn or 4.47% of total loans at end-September 2023 from THB280bn or 4.22% of total loans at end-March 2023. These new measures helping SFIs better manage their NPLs will thus form part of the government’s efforts to provide systematic debt relief.
