Mapping the global economy in the second half
Entering the second half of the year, financial market risks are becoming more apparent. Investors believe the risk of recession is increasing, resulting in volatile financial markets. We believe there are five major risks associated with five economic areas, as follows:
First, the US economy has started to suffer from rising costs. GDP in the first quarter contracted by 1.5% from the fourth quarter of last year, due mainly to increased prices of imported goods, while exports slowed in line with the global economy.
Leading economic indicators, such as the Institute of Supply Research Purchasing Managers’ Index (ISM PMI), have begun to slow down sharply, reflecting the rising cost of production and rising wages. The University of Michigan consumer sentiment index was the lowest since 2008, while its survey of one-year inflation expectations is the highest in 40 years.
Looking forward, US economic risk is associated with tightening of monetary policy to combat inflation, which makes recession risk more apparent. US liquidity is also tight, at the same level as it was before the Covid crisis.
Our US Economic Momentum Model posits that the Federal Reserve will raise interest rates to a range of 2.75% and 3% by early next year, while economic growth will continue to slow, leading to a crisis in the second quarter of 2024.
Second, the European economy is also slowing, with both manufacturing and services PMI readings confirming that view. First-quarter GDP growth slowed and inflation is at a record high, partly as a result of the Russia-Ukraine war.
The main economic risk to Europe, in our view, is the Ukraine crisis. Peace looks increasingly remote and many experts now predict a protracted conflict, as President Putin has signalled his determination to take back territory in Ukraine that he sees as Russian. This will create a risk of stagflation as a result of food and energy crises, a view increasingly shared by European policymakers including the ECB president and the Bank of England governor.
Third, economic indicators in China have begun to contract severely, as the government’s zero-Covid lockdowns have disrupted economic activities of citizens and businesses.
We believe the government will continue the policy until President Xi Jinping is sworn in for a third term in November, with continuing risk of on-and-off lockdowns hurting the economy.
Nevertheless, Chinese authorities have begun to signal easing of monetary and fiscal policy to stimulate the economy, which we believe will lessen the impact somewhat.
Fourth, economic risks arising from three factors are leading to deterioration in emerging market economies. Bloomberg Economics has ranked 19 emerging-market countries at risk of crises, based on their food and energy self-sufficiency and their risk of capital outflows, both from relatively large foreign currency debt and high current account deficits.
It identified 10 emerging markets at risk of further economic crises, including Thailand. The others are Turkey, Egypt, Vietnam, the Philippines, Poland, South Korea, Chile, China and Peru. Malaysia, India and Indonesia, meanwhile, are ranked 11th, 12th and 18th respectively on Bloomberg’s high-risk list.
Looking forward, three factors — the prolonged Ukraine-Russia war, on-and-off lockdowns in China, and tightening liquidity as a result of Fed actions — will have a negative effect on emerging economies.
Lastly, the Thai economy is at risk of high and rising production costs, global liquidity tightening and global supply chain disruption. Although first-quarter GDP was better than expected, the details behind the growth are quite worrisome.
The manufacturing sector grew at a slower pace, while the sub-sector of export goods manufacturing contracted for the first time in five quarters as a result of supply chain disruption, especially for technology products that require semiconductors.
Meanwhile, the construction sector contracted sharply for the third straight quarter, partly due to continued rising construction material prices, especially steel.
SEVEN RISK FACTORS
The monthly Thai economic numbers have also begun to fall, especially the domestic demand components such as consumption and investment. Private consumption has slowed due to the higher cost of living, while investment has slowed in terms of both investment in construction and machinery.
The manufacturing sector has started to contract due to supply chain problems and slowing demand in world markets.
The National Economic and Social Development Council has revised its economic forecast downward, as have we. Given the deteriorating conditions, we have based our revised economic assumptions on seven factors:
The protracted Ukraine war;
Higher crude oil prices;
Higher domestic diesel prices;
A possible 10-20% increase in the minimum wage;
Export growth that may increase somewhat but with negative risks;
Tourist arrivals at risk of coming in below the target of 8 million;
The baht may be weaker than previously expected.
Based on those assumptions, we expect the Thai economy to expand by around 2.9% to 3.4% this year, from a previously expected 3.6%, while inflation is likely to increase to 3-5% from 2% projected previously.
Global economic risks are all around. Investors, please be careful.