Entering the second quarter, the global economy shows signs of looking better than expected. Purchasing Managers' Index (PMI) readings, a closely watched gauge of the business outlook, are among the economic indicators that are continuing to recover.
Global PMI figures for January and February showed the manufacturing index moving above the median of 50 points for the first time in 16 months, while service sector figures also continued to recover. This is consistent with PMI indices for large economies reaching a more balanced point.
Preliminary data for March showed US business activity slowing slightly, with the composite PMI slipping to 52.2 from 52.5 in February. The manufacturing index improved to 52.5, while the services PMI dropped to 51.7. Readings in other developed economies also improved, except for Europe, where the PMI is still below the 50-point level that separates expansion from contraction.
This picture helps explain why the International Monetary Fund upgraded its global economic growth forecast for 2024 to 3.1%, the same rate as last year, from 2.9% estimated last October.
The change, it said, reflects an upturn in the US, where GDP is expected to expand by 2.1% compared with an earlier forecast of 1.5%, and China (4.6% versus 4.2%).
The growth outlook is improving because inflation has decreased, so people have more purchasing power. In the US, the labour market remains stronger than expected, with employment gains exceeding 200,000 jobs per month.
However, other numbers are beginning to show signs of greater risk. The US unemployment rate has begun to rise, while retail sales, manufacturing and private investment have begun to slow or remain in negative territory.
With global inflation slowing down, major central banks have started sending signals about reducing interest rates.
In the US, the core personal consumption expenditures index, the Federal Reserve's preferred measure of consumer inflation, continues to slow. It stood at 2.8% in February compared with 4.9% in early 2023, while the unemployment rate rose to 3.9% from 3.4% in the same period. As a result, the Fed continues to signal that it will cut interest rates three times this year.
Inflation in other developed countries is also easing. In the euro zone it slowed faster than in other countries (now at 2.6%), providing more room for rate cuts.
Even China is finally stirring to life, with hopeful signs in industrial production and fixed asset investment.
However, China faces structural problems including the decline of the real estate sector, deflation and high levels of youth unemployment.
The main strategy for reviving China's economy, it seems, is for exporters to cut product prices.
Prices of Chinese exported goods are down by an estimated 11.5% year-on-year, which is an alarming development for countries competing with China. Countries that import a lot of products from China will tend to be importing deflation as well.
Japan is the only developed country that has raised interest rates, after keeping them below zero for eight years. This is because the Bank of Japan views inflation as likely to recover structurally.
The latest nationwide wage negotiations reached an agreement for an increase of 5.3% this year, higher than last year's 3.8% and exceeding the level of inflation. This could make the recovery of inflation, now at 2.8%, more durable.
The Bank of Japan is also abolishing special measures such as yield curve control and ending the purchase of funds that invest in Japanese stocks, including ceasing purchases of Japanese real estate funds.
Given the above picture, we predict the monetary policy stances of major central banks as follows:
- The Fed can cut its key rate at its meeting in June and will reduce it four times this year.
- The European Central Bank (ECB) is expected to start cutting rates in June, also with four reductions by year-end.
- The Bank of Japan will maintain its current rate of zero to 0.1% for the whole year.
THAILAND OUTLOOK
The Bank of Thailand is expected to start cutting interest rates at either its April 10 or June 12 meeting, as the economy is still fragile.
However, we believe the government's recent decision to let the diesel subsidy expire in April, as well as the postponement of the digital wallet handout to the fourth quarter, may give the central bank second thoughts about the timeline for rate cuts.
We expect the Thai economy to expand by between 2.5% and 3%, depending mainly on government budget disbursement. If authorities can speed up disbursement from the long-delayed fiscal 2024 budget (the capital budget disbursement target is 64%, or 450 billion baht), the economy will expand by 3% from increased public and private investment. If disbursement is lower than expected, growth would slow to 2.5%.
In terms of investment strategy, we believe the Thai stock market has a chance to recover in the second quarter. With China reviving and interest rates poised to fall in some developed economies, we recommend selective buying based on three main themes:
- With the price of Brent crude oil rising above $85 a barrel, we recommend trading PTTEP and TOP while avoiding retail oil traders and airline shares.
- Among potential beneficiaries of a decline in interest rates, we recommend the finance group (TIDLOR), public utilities (GULF) and transport (AOT).
- Among speculative buys based on technical factors, look for firms whose share prices are breaking out of a downtrend and starting to see net foreign buying in March. We chose IVL, GULF, PTTGC and GPSC.
Dr Piyasak Manason is head of economic research at InnovestX Securities Co Ltd, a subsidiary of SCBX group
