Monetary policy in the major economies is approaching a turning point, while in China, the risk of deflation is receding
US
Inflation may be stickier than expected but the US economy is showing signs of slowing, and this is opening the way to rate cuts in mid-2024. At 3.2% YoY and 3.8% YoY respectively, February’s headline and core inflation rates came in slightly above market expectations of 3.1% and 3.7%. The Producer Price Index (PPI) also rose by 1.6%, up from 1% in January, while the core PPI remained flat at 2%. However, retail sales grew by just 1.5% YoY, while March’s Consumer Sentiment Index dropped for the 2nd month, falling from 76.9 to 76.5.
Although February’s inflation print was stronger than expected, prices continue to soften and should dip below 3% in 2H24. In addition, signs of a broader US slowdown have appeared in: (i) the weak growth in retail sales; (ii) the rise in unemployment to a 2-year high of 3.9%; and (iii) two months of declining consumer sentiment. As a result, the Fed may move to cut rates from their current 5.25-5.50% in the middle of 2024. In addition, more uncertainty will be added to the US economy in 2H24 with uncertainty over the US presidential election including tensions in the Red Sea and fighting in Ukraine which set to drag on.
Japan
With the country skirting a Q4 recession and companies agreeing the most generous pay hike in 33 years, the Bank of Japan may now be able to hike rates for the first time since 2007. Japan’s GDP grew by +0.4% YoY and +0.1% QoQ in 4Q23, reversing from -0.4% and -0.1%, respectively, in initial readings, thus avoiding a technical recession. The economy benefited from better-than-expected growth in capital expenditure (+2% QoQ), even though consumption still contracted (-0.3%). In addition, February’s producer price inflation came in at 0.6% YoY, in line with market expectations but up from 0.2% a month earlier.
Following the conclusion of negotiations with the Japanese Trade Union Confederation (Rengo) last Friday, large corporations across Japan have agreed a 5.28% wage rise for this year, the biggest pay raise in 33 years. Rising wages will then boost domestic consumption from Q2 onwards, and over the mid- to long-term, this may help to trigger a wage price spiral that would lift Japan out of the deflation that it has been in since 2001. Krungsri Research expects the BOJ to normalize its policy by ending negative interest rate in the near term.
China
The risk of deflation is receding but signs of recovery in the real estate market remain elusive. The headline consumer price index (CPI) rose 0.7% YoY in February, up from January’s 15-year low of -0.8% on the back of New Year spending. The services CPI rose 1.9%, consistent with non-manufacturing PMIs that remained in the expansionary zone in February (official 51.4, private 52.5). However, the producer price index (PPI) dropped 2.7%, its 17th month of declines. New and existing home prices fell 1.9% and 5.1% YoY in February, respectively. Meanwhile, declines in home sales by China’s 100 biggest developers accelerated from -34.2% to -60% in February. Moreover, Country Garden, a major Chinese real estate, recently missed interest payments worth USD 13.3mn that were due on 12 March.
Though New Year celebrations are over, the CPI should continue to rise since the oversupply situation (especially pork) improves and domestic demand gradually recovers. In addition, a drop in February PPI was due partly to the temporary halt in production during the holidays, while there are signs of a rebound in PPI in Q2 as a result of rising infrastructure investment. However, the property slump is expected to continue, even though a drop in home sales may slow down in 2H24 as measures to increase liquidity and 5-year LPR cuts to boost demand take effect.
The manufacturing sector remains weaker in Thailand than in other ASEAN nations. Debt relief measures should help up to 600,000 accounts.
Industrial sentiment is weakening, mirroring a softening of indicators for the Thai manufacturing sector. In February, the Thai Industries Sentiment Index (TISI) print came in at 90.0, down from 90.6 a month earlier. Declines were driven by worries over the cost of living and the high level of debt carried by households, which has then caused consumers to become more cautious over their spending and thus undercut domestic demand. Alongside this, exports have been hit by weakness in trade partners’ economies, while ongoing geopolitical tensions may impact European and Middle Eastern imports. Businesses are also being affected by a combination of stiffening competition from low-cost imports and higher energy costs.
Global manufacturing indicators are improving, with February’s global manufacturing PMI rising from 50.0 in January to 50.3, thereby remaining in expansionary territory for the second month. The ASEAN manufacturing PMI also rose for the second month, inching up from 50.3 to 50.4, led by improvements in the Indonesian, Philippine, and Vietnamese manufacturing sectors. However, the Thai manufacturing sector is underperforming its ASEAN peers and as such, the domestic manufacturing PMI slipped from 46.7 to 45.3, reflecting ongoing uncertainty and the risk that Thai export sector overall may not get benefit from improving global manufacturing activity. Given this, even though export value jumped by almost 10% YoY in January, at USD 22.6bn, this was still below the monthly average of USD 23.7bn maintained through 2023.
Debt relief measures effective from 1 April may help to resolve THB 12-18bn in outstanding debts. The Bank of Thailand (BOT) has stated that from 1 April 2024, qualifying low-income earners with ‘persistent debts’ (PDs) will benefit from lower interest rates and accelerated resolution of these debts. To qualify, debtors should have unsecured personal loans, the loans should not be NPLs, and interest payments should have exceeded repayments of the principal over an extended period. Debts are classified into: (i) general PDs, for which interest payments have exceeded repayments of the principal for 3 to 5 years; and (ii) severe PDs, that is, debts for which interest payments have exceeded repayments of the principal for more than 5 years and where the borrower has a monthly income of less than THB 20,000 (debts to a financial institution or financial services provider), or less than THB 10,000 (debts to non-banks.)
The BOT estimates that 600,000 accounts qualify as PDs, and with an average debt of THB 10,000-20,000, these have a total value of THB 12-18bn. The Ministry of the Interior reports that as of mid-March, 33,627 debtors have entered the program for consolidation of informal/unregulated debts, and 21,978 debts with a value of THB 899mn have been processed. However, the country’s total household debt still runs to more than THB 16trn, or 90.9% of GDP, and 59% of this is non-productive (i.e., auto and personal loans, credit card debt, and agricultural loans), that is, the loans are not investments yielding future income. Credit bureau data also indicate that as of end-2023, THB 1.05trn in household debt was classified as non-performing (NPLs or loans overdue more than 90 days), and THB 0.6trn was classified as Special Mention (SM) loans (or loans overdue more than 30 days but not exceeding 90 days). Resolving these problems will clearly take some time, and additional measures may be needed, in particular those that aim to raise incomes so that debtors are better able to make their payments.
