BULLETIN MONTHLY ECONOMIC - February 2019
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MONTHLY ECONOMIC
BULLETIN February 2019
Krungsri Research
Global: Weaker data, better sentiment
China
More pronounced slowdown in domestic demand; still
no sign of imminent recovery despite the trade truce.
Launched proactive fiscal policy to boost private
spending but we see moderate impact.
Multiple targeted monetary tools to increase liquidity.
Europe
Growth dips below potential as
US slowdown spreads, with Italy slipping
Strong payrolls and ISM data provide Japan
into recession.
Slow recovery momentum reflects
further assurance that growth Global slowdown is starting to create
remains solid at the start of 2019. continued drop in consumer confidence
more visible impact, adding to
Fed weighs “patient, wait-and-see and business capacity utilization.
domestic headwinds.
Feeling greater effects of slowing global
approach”, drops hike signal, opens ECB is on course to launch new TLTRO
door for changes to balance sheet economy than in the past.
to avoid financial tightening, while
Minor monetary policy changes are
runoffs. highlighting “state-contingent
Fed’s dovish turn suggests strong case unlikely.
guidance”.
for FOMC to repeat 2015-16 climb-
down; we now see one more hike this
year.
Krungsri Research 2IMF trims global growth forecasts to reflect tariff blow,
weaker momentum and tighter financial conditions
6.6 6.2 (6.2)
6.2 (6.2)
4.5 (4.7) 4.9 (4.9) EMs
4.6
3.7 3.5 (3.7)
3.6 (3.7)
2.9 2.5 (2.5)
1.6 (1.9) 1.8 (1.8)
1.8
1.7 (1.7)
0.9
Unit : % 1.1 (0.9)
0.5 (0.3)
Note: ( ) previous forecast
2018E 2019F 2020F
Source: IMF World Economic Outlook (January 2019), Krungsri Research
Krungsri Research 3US-China Trade Détente: Lower risk of further escalation,
but still a long way from trade deal
US-China trade negotiations are going well. There are stronger incentives for both sides to reach a deal given slowing growth and financial
market volatility. Chinese and US officials have made "important progress" in addressing their trade differences. Reports said China will buy
more agricultural, energy and manufacturing goods and services from the US, and create a fair market environment.
But both sides still far from clinching a deal. The two countries cannot yet agree on intellectual property and structural reform issues. Hence,
they are unlikely to reach a deal before the 90-day trade truce deadline on March 1. Although it is too soon to conclude they would eventually
reach an agreement, their close dialogue at least indicates lower risk of further escalation.
Issues China’s offer US demand Gap
US trade deficit with China plans to reduce trade deficit to zero in six years by There is largest progress in this area of US-China trade
China buying more US goods. US official said China made relations, though some sources say there is persistent
additional $1.2 trillion in trade commitments after 31 disagreement on the time frame.
January trade talk in Washington. Soybean imports had
also increased.
Intellectual China introduced a new law that would punish firms that There is little progress on this issue. The US still doubt
property violate intellectual property by restricting them from there is effective enforcement of China IP laws and
borrowing and state-funding support. Xinhua reported US sufficient punishment. In our view, China needs to impose
and China agreed to strengthen cooperation on intellectual serious punishment for violators and increase penalty such
property rights and technology transfer. as jail-time.
Technology transfer China has eased foreign holding restriction and increased The US is not satisfied with this, although they did not
through joint- foreign ownership cap in the financial sector. It is consider elaborate on the details. In our view, China can allow
venture / Openness expanding to other restricted industry. Unless jointure foreigners to invest in more sectors and eliminate
for foreign venture is lifted, foreign companies have to transfer complicated regulatory and taxation laws which are cited
investment technology in exchange for doing business in China. by foreign firm as the main barriers to entry.
Industrial subsidy China has postponed the “Made in China 2025” industrial Many US key officials cite lack of progress in this area. In
subsidy plan by 10 years. our view, it is most difficult for China to offer full concession
in this area as it is a key strategy for China’s next stage of
development, to create it own innovation and technology.
Source: USTR, Bloomberg, Xinhua, Financial Times, Krungsri Research
Krungsri Research 4Potential tariff reversal to have positive impact on global
GDP, minimal negative impact on Thailand
A reversal of recently imposed tariffs could increase world output by 0.03% from baseline. The effect on output for China would be
+0.16%, US +0.04%, and Thailand -0.01%.
If the US and China sign a FTA (reduce tariffs on all imports to zero), US-China bilateral trade could increase and raise output in China by
0.35% and US by 0.05%. The smaller impact on the US reflects: (i) US bilateral trade deficit with China will widen; (ii) export contribution to
China’s GDP is larger than for the US.
On the other hand, the FTA deal will reduce world output by 0.04% from baseline. The rising US-China bilateral trade will reduce the two
countries’ imports from other parts of the world. Vietnam and Cambodia will be most affected, with output possibly falling by 0.18% and
0.1% from baseline given their high concentration in US-China markets. Thailand will see a mild impact (-0.02%), in line with other Asian
countries, because the FTA deal could increase demand for intermediate goods, which would partly offset the negative impact.
Impact on real GDP (% Change from baseline)
0.4 0.35
Cumulative impact from current situation
Marginal effect of each round
0.3 Reverse 2nd trench Reverse US: $200bn 10%, China: $60bn 5-10%
Reverse 1st trench Reverse US & China: $50bn, 25% tariff
US-China FTA US-China impose 0 tariff on all goods for each other
0.2
0.1
0.05 0.04
0.0
-0.01 -0.01 -0.01 -0.01 -0.01 -0.02
-0.05
-0.1
-0.10
-0.2 -0.18
China USA World Japan Taiwan Indonesia Philippines Malaysia Thailand Korea Cambodia Vietnam
Source: Global Trade Analysis Project (GTAP), Krungsri Research
Krungsri Research 5Thai industry-level: Electronics and automobiles will be
hardest hit if US and China reach a FTA deal
The impact of a potential US-China FTA deal will vary across sectors. Electronics and automobiles will be top losers. Textiles & apparels and
agricultural sector will also be hurt but the impact should be mitigated by high reliance on domestic market. Intermediate goods will be the prime
beneficiaries, i.e. machinery & equipment, metal products, chemical & plastic products. Food & Beverage industries could also benefit.
US-China reduce tariffs to zero: Net effect on Thai industries vs. their export dependency
Rely on export market
100
Size of bubble represents share of each MET Basic metals
industry’s output to Thailand’s total outputs MEQ Machinery and equipment
FOD Food, beverages and tobacco
ELQ CHM Chemical, rubber, plastic products
FBM Fabricated metal products
80
Export to total production (%)
MEQ PTC Petroleum, coal products
CHM
FBM
MTR
MET
60
-2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0
40
Rely on domestic market
FOD
TEX
NMM
TEX Textiles, apparel and leather 20
ELQ Electronic and computer equipment
MTR Motor vehicles, trailers PTC
NMM Other non-metallic mineral products AGR
AGR Agriculture fishing and forestry
0
Net effect on industrial production (% change from current situation)
More negative impacts from tariffs More positive effect from tariffs
Source: GTAP, Krungsri Research
Krungsri Research 6US: Strong payrolls and ISM data provide further
assurance growth remains solid at the start of 2019
The 304k jump in non-farm payrolls in January shows the government shutdown had little impact. Federal government payrolls were broadly
unchanged last month as the 800k unpaid Federal workers during the shutdown would still be counted as employed, according to the BLS. The ISM
manufacturing index rose to 56.6 in January from 54.3, partly reversing from the 4.5ppt plunge in December, largely driven by a big rise in the new
orders index to 58.2 from 51.3. However, slowing global demand is having some impact, with new export orders dipping to 51.8 in January, the
lowest level since Oct’16. This is an indication the strength of the domestic economy is offsetting any drag from overseas.
’000 sa Change in Non-farm Payrolls DI sa ISM survey
400 66
Latest 6-month ma 64
304
300 62
60
58
200 232 56 Headline
54 New Orders
100 52 New Export Orders
50
Jan-18
Jan-18
Feb-18
Mar-18
May-18
Jul-18
Dec-18
Jan-19
Feb-18
Mar-18
May-18
Jul-18
Dec-18
Jan-19
Apr-18
Jun-18
Aug-18
Sep-18
Oct-18
Nov-18
Apr-18
Jun-18
Aug-18
Sep-18
Oct-18
Nov-18
0
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Jan-17
Jul-17
Jan-18
Jul-18
Jan-19
Manufacturing Non-Manufacturing
‘000 sa Federal government payrolls % QoQ saar Real GDP growth
100 Indicate the government shutdown
8.0
80 35 days 6.0
60 4.0
3 days 1 day 8
40 2.0
20 0.0
0 -2.0
-4.0 Actual growth
-20 -15
-5 -6.0 Potential growth
-40
-60 -8.0
Mar-90
Mar-92
Mar-94
Mar-96
Mar-98
Mar-00
Mar-02
Mar-04
Mar-06
Mar-08
Mar-10
Mar-12
Mar-14
Mar-16
Mar-18
Mar-20
Jul-13
Jul-14
Jul-15
Jul-16
Jul-17
Jul-18
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Source: Bureau of Labor Statistics (BLS), Bureau of Economic Analysis (BEA), Krungsri Research
Krungsri Research 7Fed weighs “patient, wait-and-see approach”, drops hike
signal, opens door for changes to balance sheet plans
Fed officials Speech
January FOMC statement The statement removed a reference to “some further gradual increases” in the fed funds rate, and included
“the Committee will be patient as it determines what future adjustments to the target range for the federal
funds rate may be appropriate”. The Committee is “prepared” to “adjust balance sheet normalization” and
“use its full range of tools, including altering the size and composition of its balance sheet”.
Powell “The cumulative effects of those developments over the last several months warrant a patient, wait-and-see
Voting
Neutral member approach regarding future policy changes”. "The case for raising rates has weakened somewhat”. When asked
whether the statement indicated the end of the tightening cycle, Powell said “The length of this patient period
is going to depend entirely on incoming data and its implications for the outlook”.
Clarida “I believe we can afford to be patient about assessing how to adjust our policy stance to achieve and sustain
our dual-mandate objectives...I believe patience is a virtue and is one we can today afford.”
Williams “The approach we need is one of prudence, patience, and good judgment.”
Hawk
George “I am mindful that the effects of past policy actions have not yet fully played out, calling for patience in
considering our policy actions,’’ “A pause in the normalization process would give us time to assess if the
economy is responding as expected with a slowing of growth to a pace that is sustainable.’’
Rosengren “The market’s effect of tightening financial conditions – coupled with the uncertainty in forecasts – make it
imperative that monetary policy should be data dependent.”
Evans “I feel we have good capacity to wait and carefully take stock of the incoming data and other developments.”
Dove
Bostic “To me, the appropriate response is to be patient in adjusting the stance of policy and to wait for greater
clarity about the direction of the economy and the risks to the outlook.”
Kaplan “In the first couple of quarters of this year, my base case would be take no action at all. That could change if
things improve, but my own view right now is that we should be patient.”
Source: Board of Governors of the Federal Reserve System, Financial Times, Bloomberg, CNBC, Krungsri Research
Krungsri Research 8Fed’s dovish turn suggests strong case for FOMC to repeat
2015-16 climb-down; we now see one more hike this year
% Fed Funds Rate vs GDP growth % % Fed Funds Rate vs Longer run dots
3.50 FOMC dots* Reality GDP growth 3.50 5.0
Downturn 2 hikes
3.00 3.00 4.0
?
4 hikes
2.50 2.50 3.0
2.00 3 hikes
2.00 2.0 Longer run rate – Lower/Upper estimates
3 hikes Fed Fund Rate – Lower/Upper bound
1.50 1.50 1.0
4 hikes 3 hikes
1.00 4 hikes
1.00 0.0
1 hike
1 hike
0.50 0.50 -1.0
Mar-12
Sep-12
Mar-13
Mar-14
Mar-15
Sep-17
Mar-18
Sep-18
Jun-12
Dec-12
Sep-13
Sep-15
Mar-16
Sep-16
Mar-17
Jun-13
Dec-13
Sep-14
Jun-14
Dec-14
Jun-15
Dec-15
Jun-16
Dec-16
Jun-17
Dec-17
Jun-18
Dec-18
0.00 0.00
2015 2016 2017 2018 2019
* The December projection in the preceding year
% Probability of US recession in 12 months ahead Krungsri Research’s view
50 In 2017-18, the Fed had led financial markets rather than follow them,
Shaded areas indicate recessions
resulting in the market’s conviction eventually aligning with the Fed’s
40 forward guidance. This move was used to reduce overheating risks as the
economy had expanded beyond potential. But this year is different as the
30 economy is experiencing a downturn. Given this, the Fed will likely shift its
strategy towards following markets (currently pricing in no rate hike this
year) to some degree. This is similar to what happened in 2015-16 when
20
the Fed delivered one hike a year, compared to four hikes it projected
earlier. Given that the upper bound of funds rate is at the lower end of
10
long run rates and recession probability has risen sharply, there is rising
chance the Fed will not hike rates twice this year as planned. We now
0
expect one more rate hike from the FOMC (instead of two) and slower
Jan-90
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
pace of balance sheet normalization, e.g. taper runoff amount (currently
USD50bn/month) or end the plan.
Source: Board of Governors of the Federal Reserve System, Federal Reserve Bank of New York, BEA, Bloomberg, Krungsri Research
Krungsri Research 9Market is excessively dovish given current state of
economy, assurance from possible tapering of runoffs
% prob. Market-implied Federal Funds Rates % Summary of Economic Projections
90 5.00
No hike in 2019 Dec’15 Dec’18
80 4.00
70 One hike in 2019
60 Two hikes in 2019 3.00
50 2.00
40
1.00
30
20 0.00
2015 2018
2016 2019
2017 2020
2018 2021
LR
2015 2018
2016 2019
2017 2020
2018 2021
LR
2015 2018
2016 2019
2017 2020
2018 2021
LR
2015 2018
2016 2019
2017 2020
2018 2021
LR
10
0
May-18
Jun-18
Jul-18
Aug-18
Dec-18
Jan-19
Sep-18
Oct-18
Nov-18 GDP Unemployment PCE Core PCE
growth rate inflation inflation
Index US Financial Conditions Krungsri Research’s view
1.5 The markets are pricing out the Fed rate hike this year. However,
1.0 the market is excessively dovish given the current state of the
economy. The FOMC’s latest economic forecast (2018-2021) is
0.5 Ease
more sound than December 2015 projection (2015-2018), when
0.0 the Fed started to raise rates. Despite a projected slowdown, GDP
growth is likely to exceed potential. Unemployment is projected to
-0.5 Tight stay below 4%. Inflation would remain close to 2% target.
-1.0 In addition, tightening of financial conditions have reversed sharply
following the Fed’s dovish turn and the US-China trade détente.
-1.5 What’s more, a possible tapering of balance sheet runoffs could
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Jan-17
Jul-17
Jan-18
Jul-18
Jan-19
Jul-19
offer some assurance of economic and financial conditions, leaving
room for more rate hikes.
Source: Board of Governors of the Federal Reserve System, Bloomberg, Krungsri Research
Krungsri Research 10Europe: Growth dips below potential as slowdown
broadens, with Italy slipping into recession
Growth fell below potential in 4Q18: disruption in car GDP was a bit firmer than expected in 4Q18 led by net
sector partly to blame; domestic demand lost momentum exports but domestic demand growth was subdued
Eurozone GDP growth France GDP growth
3.0 3.0
% QoQ sa % QoQ sa
2.5
% YoY 2.0 % YoY
2.0
0.9
1.5 1.2 1.0
1.5-1.6%
1.0 “potential growth” 0.3
0.0
0.5 0.2
0.0 -1.0
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18
Weak domestic demand led by poor confidence among Despite slowing, economy continued to grow above-trend
consumers and firms pushed economy back to recession and outperformed the Eurozone average
Italy GDP growth Spain GDP growth
2.0 4.0
% QoQ sa
1.5
% YoY 3.0 2.3
1.0
0.3 % QoQ sa
0.5 2.0
% YoY
0.0
1.0 0.7
-0.5 -0.2
-1.0 0.0
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18
Source: Eurostat, Bloomberg, Krungsri Research
Krungsri Research 11Global slowdown starting to create more visible impact,
adding to domestic headwinds
% YoY Export growth (3mma) % DI Net percentage of banks reporting an increase in
25 World 50 loan demand
20 EU28 40
15 Intra-EU28 30
10 Extra-EU28 20
10
5
0
0
-10
-5 -20 Enterprises
-10 -30 House purchase
-15 -40 Consumer credit
-20 -50
Jul-14
Jul-15
Jul-16
Jul-17
Jul-18
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Apr-14
Oct-14
Apr-15
Oct-15
Apr-16
Oct-16
Apr-17
Oct-17
Apr-18
Oct-18
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Jan-17
Jul-17
Jan-18
Jul-18
DI Business sentiment survey DI
Krungsri Research’s view
62 Manufacturing PMI 120
Non-Manufacturing PMI Export growth continued to drop in the European Union, driven
60 115 by slowing global growth and trade policy uncertainties. More
German Ifo (RHS)
EC sentiment (RHS) importantly, export slowdown was greater within than outside
58 110
the bloc. This suggests the domestic economy is weak as well.
56 105
Looking ahead, all business sentiment survey data point to a
54 100 further weakening of economic activity at the start of 2019.
Meanwhile, business activity and consumption should continue
52 95 to weaken, as reflected by continued weak demand for loans.
50 90 The upshot is that the recent slowdown is clearly due to more
Jul-16
Jul-17
Jul-18
Jan-16
Jan-17
Jan-18
Jan-19
Apr-16
Oct-16
Apr-17
Oct-17
Apr-18
Oct-18
than just temporary factors – the disruption in the auto industry.
Source: World Trade Organization (WTO), European Central Bank (ECB), European Commission (EC), Ifo Pan Germany Business Climate, Markit, Bloomberg, Krungsri Research
Krungsri Research 12ECB is on course to launch new TLTRO to avoid financial
tightening, while highlighting “state-contingent guidance”
% ECB staff projections for Euro area Key notes from ECB Meeting on January 24
2.20
September December As expected, the ECB maintained its commitment to leave interest
2.00
rates unchanged “at least through the summer of 2019, and in any
1.80 case for as long as necessary”. And it stuck to its pledge to reinvest
1.60 proceeds from maturing securities for “an extended period of time
1.40 past the date when it starts raising the key ECB interest rates”.
European Commission
1.20 (Feb’19) The ECB acknowledged “the risks surrounding the euro area
growth outlook have moved to the downside” (vs “broadly
1.00
balanced” in the December meeting), on the back of “the
0.80 persistence of uncertainties” (e.g. the threats of protectionism,
2018
2019
2020
2021
2018
2019
2020
2021
2018
2019
2020
2021
Brexit). ECB president Draghi blamed "softer external demand and
Real GDP HICP inflation Core HICP some country and sector-specific factors," but indicated the ECB
inflation
still has some confidence in the underlying strength of the
TLTROs (EUR, bn) economy, adding that there was “unanimity about assessing the
800 800 likelihood of a recession as being low”.
If TLTROs not rolled over
Draghi said there was a “state-contingent” and a “date-contingent”
600 600 element to the ECB’s interest rate guidance. In this regard, he
noted market pricing for the first rate hike in 2020 (instead of
379.9 2019) is consistent with its state-contingent guidance.
400 400
Draghi also suggested “several” members had discussed the
Maturity amount 233.2
targeted long-term refinancing operations (TLTROs) and underlined
200 Outstanding amount 200 their effectiveness in restoring transmission of monetary policy as
44.3 61.5 well as addressing fragmentation across the Euro area in 2012-14.
0 0 To avoid a potential “financial cliff” in 2020-2021, the ECB might
Jan-19
Jul-19
Jan-20
Jul-20
Jan-21
Apr-19
Oct-19
Apr-20
Oct-20
Apr-21
announce in March that it will be offering new refinancing
operations, which would probably be implemented in June.
Source: ECB, EC, Bloomberg, Krungsri Research
Krungsri Research 13China: More pronounced slowdown in domestic demand;
still no sign of imminent recovery despite trade truce
Real GDP growth contribution % YoY Retail sales and industrial indicators % YoY
Retail sales Industrial production
Net Exports Investment Consumption Real GDP 12 70
Industrial profit (RHS)
6.7 6.8 11 60
7.0 7.0 6.9 6.8 6.7 6.7 6.8 6.8 6.7 6.7 6.8 6.7 6.5 50
6.4
10
2.1 2.1 2.1
40
1.3 9 30
8 20
5.3 5.3 5.0 4.6 7
10
0
6 -10
-0.6 -0.7 -0.6 0.5 5 -20
Jan-16
Jul-16
Jan-17
Jul-17
Jan-18
Jul-18
Apr-16
Oct-16
Apr-17
Oct-17
Apr-18
Oct-18
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18
Krungsri Research’s view
2018 2019
% YoY 4Q18 GDP eased to 6.4% YoY (vs 6.5% in 3Q18), taking full-year 2018
J F M A M J J A S O N D J growth to 6.6% YoY (vs. 6.8% 2018). Although headline growth was firm,
NBS manufacturing PMI 49.5 growth components were not encouraging. Net exports added 0.5ppt to
Sub index GDP, snapping a 3-quarter streak of negative contributions. But we read
Production 50.9 this as negative (rather than positive) as the slump in imports was
New orders 49.6 greater than in exports. In other words, the slowdown in consumption
New Export Orders 46.9 and investment has become more pronounced.
Raw Material Inventories 48.1
Looking at December data, despite a pickup in retail sales and industrial
By firm size
production, it is too soon to conclude that economic activity is
Large 51.3
recovering. Industrial profits continue to contract, which could
Medium 47.2
discourage firms from increasing production going forward. Plus, PMI
Small 47.3
surveys for January point to deteriorating business conditions among
Caixin Manufacturing PMI 48.3
SMEs – the backbone of the economy. A decline in new orders sub-index
suggests sluggish demand (both at home and abroad) down the road.
Source: National Bureau of Statistics (NBS), Financial Times, Bloomberg, Reuters, CEIC, Krungsri Research
Krungsri Research 14Launched proactive fiscal policy to boost private spending
but we see moderate impact
Policy Policy Implication Marginal
tax rate (%) Personal income tax cuts
Deficit & • Finance Ministry is set to propose a budget deficit Proactive fiscal policy will 40 35.6
Local target of 2.8% of GDP vs last year’s 2.6%. shore up growth. Larger Previous
• Approved larger quota for local government bonds quota for special bonds will 35
government
bond to fund infrastructure investment, worth be on balance sheet, unlike 30 New with deductions 26.6
RMB810bn. 2015. 33.0
25 20.5
Import tax • Cut tariffs on more than 700 goods from Jan 1. This shows China’s efforts to 22.1
• Set zero tax on import of meal including sunflower & open up the economy and 20 15.6
canola, to substitute soybean meal. reduce costs for consumers 15
• MFN tariffs for IT and high-tech sector will be cut on and producers. 7.5 12.7
July 1. 10
• Personal income tax cuts, designed to spur It will be worth up to 0.5% of
5 0.9 4.5
Income tax
consumption, took effect in January. GDP and could boost retail 0 0.3
sales by about 1 %. Expect 5 10 20 40 80 160
further corporate tax cuts.
Monthly income (RMB ‘000)
Durable • NDRC announced it will roll out policies to support May cut VAT to spur
consumption of products such as autos and home consumption but that would % deviate
goods from Consumption cycle of household facilities
support appliances. have moderate impact
trend and transports
3
Krungsri Research’s View Household Facilities Transports
2 Tax cuts
Private spending should remain weak given falling confidence and projected
1
moderate impact from income tax cuts. Instead, government spending may play a
more important role in supporting the economy. Local government will be allowed to 0
issue more special bonds to fund infrastructure projects. Thus, fiscal stimulus will -1
likely be greater than target. -2 The Go Rural Policy & The
We also see modest-to-moderate impact from measures to boost spending on -3 Energy Saving Subsidy Policy
durable goods. On car purchases, there was front-loaded demand in 2015-17, so
effects of new stimulus should be minimal. On home appliances, there will be -4
replacement demand, which occurred in 2013-15 driven by the previous stimulus -5
policy (Go Rural & Energy Saving Subsidy policies). But, growth might moderate given 1Q13 4Q13 3Q14 2Q15 1Q16 4Q16 3Q17 2Q18
last year’s high base.
Source: Financial Times, Reuters, Bloomberg, Krungsri Research
Krungsri Research 15Multiple targeted monetary tools to increase liquidity
Monetary tools Details Implication
RRR cut Expand coverage of previous targeted RRR cut on Jan 2 (loans RRR cut and expansion of targeted RRR qualification criteria
(reserve to small & micro-sized enterprises with credit line of less than would maintain liquidity ahead of Chinese New Year holidays
requirement ratio) RMB10mn, up from previous standard of RMB5mn) and provide cheaper and more stable long-term funding
Broad-based 1ppt cut in RRR, 50bps each on Jan 15 and Jan 25, compared to other tools. Moreover, ensuring liquidity would
partly replacing maturing MLF in Q1 (around RMB1.2tn). support the issuance of local government bonds.
Expect to increase net liquidity by RMB800bn
TMLF On Jan 23, Injected RMB257.5bn funds via TMLF at 3.15%, PBOC aims to boost Medium-term liquidity of financial
(Targeted Medium- 15bp below the regular one-year MLF interest rate. institutions and control cost of lending to small firms. Also, this
term Lending The funds have a maximum maturity of three years and re- will reduce over-dependence on RRR cuts, which could end up
Facility) lending and rediscount quota of RMB100bn, given that funds providing too much liquidity and increase outflow pressure.
must only be lent to small and private enterprises.
Perpetual bonds PBOC allows primary dealers engaged in open-market This move can boost demand for perpetuals and support
support operations to swap perpetual bonds for central bank bills. banks to issue such bonds to replenish capital.
Will include perpetual bonds with rating equal to or higher
than AA as collateral for monetary operations - MLF, TMLF, SLF
OMOs PBOC pumped in net RMB560bn into financial system on Jan PBOC wanted to maintain sufficient liquidity during peak
16, the biggest one-day record season for tax payments and ahead of the Chinese New Year.
3-month Effective lending rate and Interbank Krungsri Research’s View
% %
8 rate (SHIBOR) 6 To support liquidity in the financial market and prevent excessive
interbank rate Effective lending rate (RHS)
outflows and a weaker yuan, the PBOC recently used a wide range of
6 4 targeted monetary tools. Given rising uncertainties and unfavourable
sentiment since 2H18, monetary policy transmissions have become less
effective. Lending rates are still high despite several RRR cuts.
4 2 To improve policy transmission, there is a need for more monetary
policy easing given weakening economic data and easing downward
pressure on the yuan (due to dovish stance of major central banks and
2 0
good progress in trade talks).
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18
Source: People's Bank of China (PBOC), Bloomberg, Financial Times, Reuters, Krungsri Research
Krungsri Research 16Japan: Slow recovery momentum reflects continued drop
in consumer confidence and business capacity utilization
Retail sales increased moderately in December, led by machinery GDP should remain weak in the near term, as reflected by persistent
and apparels, partly due to favorable weather. Food & Beverage weak business outlook surveys. Exports was subdued due to slowing
saw slower growth. Looking ahead, consumption will face global trade. Imports surged led by recovering consumption after a
headwinds, e.g. falling consumer confidence, softer economic natural disaster. Investment growth remained resilient but is likely to
activities, and the impending consumption tax hike. slow down as capacity utilization continues to drop.
Retail sales % YoY GDP vs Tankan Business Conditions Change from
previous year
%YoY Share J F M A M J J A S O N D 10 40
Retail sale 100.0 GDP Tankan (RHS)
Vehicles 12.5 5 20
Machinery & Equipment 4.2
General Merchandise 8.4 0 0
Apparel 7.6
Food & Beverages 31.2 -5 -20
Fuel 9.1
Medicine & Toiletry 7.0 -10 -40
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Nonstore retailers 5.2
sa Consumer Confidence Index by components
% YoY Investment vs Production capacity Change from
50 previous year
20 10
48
10 5
46
Employment
44 0 0
Willingness
to buy
42 durable good -10 -5
Income growth Non-resdential investment
40 -20 -10
Livelihood Production capacity (RHS)
38
-30 -15
Jul-18
Aug-18
Feb-18
Mar-18
Apr-18
May-18
Sep-18
Oct-18
Jan-18
Jun-18
Nov-18
Dec-18
Jan-19
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Source: Bank of Japan (BOJ), Cabinet office, Statistical Bureau, Bloomberg, Krungsri Research
Krungsri Research 17Slowing global economy having larger effects than before
Japan would be affected by the global slowdown as the country relies heavily on demand from China and the US. China is increasingly becoming a
prominent market for Japan, as reflected by the sharp increase in the share of revenue from Japanese subsidiaries in China, in contrast to smaller
share of export sales to third parties. Industry-wise, export products which account for a significant share of China’s consumption will be affected.
These exports include food, vehicles, transport equipment and machinery. Moreover, a down cycle in semiconductor exports led by the US could
also affect Japan as a leading manufacturer of electronic machinery and equipment.
Overseas subsidiaries in US Overseas subsidiaries in China Semiconductors and semiconductor equipment
% Domestic Re-exports to Japan Exports to third countries % YoY, 3mma % YoY
Semiconductors (LHS)
100 100 10 65
14.2 9.3 Semiconductor Equipments (two months lag)
21.3
96 6.8 7.5 80 32.2 16.8 55
8.8 9.2 22.9 0 45
26.5
92 1.8 1.6 60 35
1.9 1.8 33.1
-10 25
88 40 74.0
91.5 62.9 15
90.9 52.2
84 89.3 89.0 20 -20 5
34.8
-5
80 0
2001 2006 2011 2018 2001 2006 2011 2018
-30 -15
Jan-16 Jun-16 Nov-16 Apr-17 Sep-17 Feb-18 Jul-18 Dec-18
Proportion of intermediate and final goods exported to China, US & ROW (2015)
Intermediate good China US ROW Final good China US ROW
83 82
71 73 66 73
63 61 62 58 62
46 48 54
43 39 38 38
30 32 26 24 33 32
15 18 20
6 4 9
Agriculture Food & Textiles Chemicals Basic & Computer & Electrical Machinery & Motor Transport
& fishing beverages & mineral fabricated electronic equipment equipment vehicles equipment
metals
Source: METI, Statistical Bureau, OECD, Bloomberg, Krungsri Research
Krungsri Research 18Minor monetary policy changes are unlikely
GDP growth Core CPI Krungsri Research’s view
% %
The BOJ has slashed 2018 GDP growth forecast to 0.9% from 1.4%, to
1.6 Oct' 18 1.7 reflect the large impact of a natural disaster in 3Q18. But, the BOJ is
July' 18 more optimistic of medium-term growth as it has revised growth
1.4 Jan' 19 1.5 forecasts for 2019 and 2020 to 0.9% and 1%, respectively, premised on
major stimulus program designed to mitigate the impact of an increase
1.2 1.3 in consumption tax in Oct’19.
Meanwhile, the BOJ cut its inflation outlook for the third time following
1.0 1.1 weaker oil prices. Looking ahead, inflation could face downward
pressure from cheaper phone bills and free education for young
0.8 0.9 children.
Loan support program (funds to stimulate bank lending) and fund-
0.6 0.7
supplying operation to support financial institutions in disaster-affected
2018 2019 2020 2018 2019 2020 areas have been extended to Mar’19 and Apr’19, respectively.
Governor Kuroda is concerned about global uncertainties, e.g. US-China
trade dispute and political uncertainty in Europe. These factors had led
DI Degree of bond market functioning
to growing risk aversion among investors and could effect Japan’s
economy. However, he thinks the market has overreacted and
0
likelihood of a sharp China downturn causing major damage to global
-10 Higher degree of growth remains slim given fiscal and monetary measures .
market functioning
We maintain our view that the BOJ will keep is targets for short- and
-20
long-term interest rates at -0.1% and 0%, respectively, until Mar’20.
-30 Chance of further easing remains low due to rising concerns about the
adverse effects of low interest rates on bank profits and the low degree
-40
of bond market function. On the other hand, formal (rather than
-50 practical) announcement of tightening is also limited due to downward
pressure from inflation. Moreover, spillover effects from risk-off
-60 sentiment arising from volatile global markets and increased global
Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 Aug-18 uncertainty will discourage the BOJ from adjusting its policy, even minor
changes such as allowing slightly wider 10-year bond yield.
Source: BOJ, Bloomberg, Krungsri Research
Krungsri Research 19Thailand: Domestic strength sparing external headwinds
December economic data support expectations of stronger growth in 4Q18
Private consumption growth was firm at 3.5% YoY in December (vs 3.8% YoY in November) with steady growth in purchases of
non-durable goods (+3.1% YoY). Spending on durable goods and services softened, understandably, as eligibility criteria for the
year-end tax incentive in 2018 was stricter than in 2017. Private investment growth moderated to 1.8% YoY (vs +3.1% in
November), largely reflecting a sharp correction in imported capital goods (-1.2% vs +6.5% YoY in November) and the
Construction Permit Index moving deeper into negative territory. On a positive note, domestic machinery sales and new motor
vehicle registrations continued to strengthen.
On external demand, merchandise exports slipped 1.7% YoY in December, taking full-year growth to 6.7%, moderating from 9.9%
in 2017. Foreign tourist arrivals recovered strongly in December, rising 7.7% YoY, the largest rise since June. Chinese tourist arrivals
returned to positive growth of 2.8% YoY; it eventually took 6 months to return to pre-crisis levels. For full-year 2018, total tourist
arrivals rose 7.9% to 38.3m.
The Manufacturing Production Index rose 0.8% YoY in December (vs +0.9% in November). Despite mild headline growth, industry-
level data showed broader expansion, with 8 out of 10 major industries registering output increases compared to 5 in November.
Seasonally-adjusted Capacity Utilization has levelled off to 67.8% in December from the cyclical high of 70.4% in November.
GDP growth to bounce back to 4% in 4Q18, taking 2018 growth to 4.2%
With all quarterly data collated, we expect GDP growth to recover from 3.3% YoY in 3Q18 to 4% in 4Q18, taking 2018 growth to
4.2% (vs 3.9% in 2017). This is reflected by: (i) broader growth of private consumption expenditure; (ii) continued expansion in
gross fixed capital formation; (iii) stronger public spending; and (iv) smaller drag from net exports (due to larger current account
surplus). GDP readings for 4Q18 and 2018 will be released on February 18.
MPC keeps policy rate for now, signals March rate hike likely
The Monetary Policy Committee (MPC) voted 4-2 to leave policy rate unchanged at 1.75%, with one member absent from the
meeting. The MPC sounded upbeat on the outlook for the economy but acknowledged increased downside risks, largely
stemming from external uncertainties. Based on our recent study, the 4-2 vote suggests 65.6% chance of a March rate hike.
Coupled with the hawkish tone of the post-meeting statement, we continue to expect the current hike cycle to conclude after the
next 25bps rate hike in March to take policy rate to 2.00% throughout the rest of 2019.
Krungsri Research 20Krungsri Research forecasts
Krungsri Research Forecast 2016 2017 2018F 2019F
GDP growth YoY (%) 3.3 3.9 4.3 4.1
Private Cons umption Expenditure YoY (%) 3.0 3.2 4.8 4.3
Government Cons umption Expenditure YoY (%) 2.2 0.5 2.3 2.6
Private Inves tment YoY (%) 0.5 1.7 4.1 4.8
Public Inves tment YoY (%) 9.5 -1.2 6.5 8.0
Nominal Exports in USD (f.o.b.) YoY (%) 0.1 9.8 7.7 4.5
Nominal Imports in USD (f.o.b.) YoY (%) -5.1 13.2 14.3 6.5
Current Account Balance USD, bn 48.2 50.2 37.7 29.5
Touris t Arrivals YoY (%) 8.9 8.8 7.5 8.0
Headline Inflation YoY (%) 0.2 0.7 1.1 1.1
Core Inflation YoY (%) 0.7 0.6 0.7 0.9
Exchange rate (average) THB/USD 35.3 33.9 32.3 32.0
Policy Interes t rate (end of period) (%) 1.50 1.50 1.75 2.00
Dubai crude price - period average USD/bbl 41.5 53.1 69.2 66.5
Source: NESDC, Bank of Thailand (BOT), Ministry of Commerce (MOC), Ministry of Tourism and Sports (MOTS), Bloomberg, Krungsri Research
Krungsri Research 21Domestic activity strengthening as improvements in
income conditions are increasingly broad-based
Private consumption growth was firm at 3.5% YoY in December (vs 3.8% YoY in November) with steady growth in purchases of non-durable goods
(+3.1% YoY). Spending on durable goods and services softened, understandably, as eligibility criteria for the year-end tax incentive in 2018 was
stricter than in 2017. Private investment growth moderated to 1.8% YoY (vs +3.1% in November), largely reflecting a sharp correction in imported
capital goods (-1.2% vs +6.5% YoY in November) and the Construction Permit Index moving deeper into negative territory. On a positive note,
domestic machinery sales and new motor vehicle registrations continued to strengthen.
% YoY Private spending indicators % YoY Farm income indicators
8.0 Consumption 40 Farm income
6.0 Investment 30 Farm price
Farm output
4.0 20
2.0 10
0.0 0
-2.0 -10
-4.0 -20
Jan-16
Jul-16
Jan-17
Jul-17
Jan-18
Jul-18
Jan-19
Jan-16
Jul-16
Jan-17
Jul-17
Jan-18
Jul-18
Jan-19
Apr-16
Oct-16
Apr-17
Oct-17
Apr-18
Oct-18
Apr-16
Oct-16
Apr-17
Oct-17
Apr-18
Oct-18
% sa Manufacturing production indicators % YoY % YoY Non-farm wage (12mma)
72 Capacity utilization (LHS) 8.0 5.0 Bangkok Northeast
4.0 North South
70 Industrial production 6.0
3.0 Central
68 4.0 2.0
66 2.0 1.0
64 0.0 0.0
-1.0
62 -2.0 -2.0
60 -4.0 -3.0
Jan-16
Jul-16
Jan-17
Jul-17
Jan-18
Jul-18
Jan-16
Jul-16
Jan-17
Jul-17
Jan-18
Jul-18
Jan-19
Apr-16
Oct-16
Apr-17
Oct-17
Apr-18
Oct-18
Apr-16
Oct-16
Apr-17
Oct-17
Apr-18
Oct-18
Source: BOT, Office of Industrial Economics (OIE), Office of Agricultural Economics (OAE), National Statistical Office (NSO), Krungsri Research
Krungsri Research 22Global slowdown and trade dispute add to export
headwinds Exports by major product (% YoY)
High growth Oct-18 Nov-18 Dec-18
Modest/Moderate growth 27.8 27.4
Contraction 18.5 18.5 19.9
8.7 11.2 9.8
6.8 5.1 5.8 4.7 4.3
2.8 4.0 3.7 4.1
0.3
-0.9 -1.7 -1.0 -3.3 -0.3 -1.7
-6.5 -5.6
-11.3-9.3 -9.5
-13.5
Total Agricultural Processed Electronics Automobile Electrical Plastic Rubber Construction Chemical
exports products foods HDD, IC & parts appliances products products materials products
(9.2%) (8.5%) (15.2%) (14.9%) (9.6%) (5.8%) (4.4%) (3.9%) (3.6%)
Exports by major destination (% YoY) Oct-18 Nov-18 Dec-18
24.4
18.7 18.2 17.6
11.9 8.3
7.2 8.0
0.6 4.3 2.7 3.0
-3.4 -2.0 -4.3 -4.3 -4.2 -5.9
-8.9 -7.3 -7.4 -9.8
-17.4 -16.0
US EU27 Japan China ASEAN5 CLMV Middle East Africa
(11.2%) (9.1%) (9.3%) (12.5%) (14.6%) (10.6%) (3.8%) (2.9%)
Note: ( ) share in 2018
Source: MOC, Krungsri Research
Krungsri Research 23Risks to our 2019 export growth forecast (4.5%) remain
broadly balanced
Imports by major products (% YoY)
High growth 75.3
Oct-18 Nov-18 Dec-18
Modest/Moderate growth
Contraction
21.1 19.2
14.7 12.3 13.5 16.4
11.2 8.7 8.7 9.5
6.4 2.8 8.8 3.6
-1.9 -3.1
-8.2
Total imports Fuel lubricants Capital goods* Raw materials** Consumer goods Vehicles
(14.1%) (24.8%) (36.0%) (11.3%) (6.1%)
Note: ( ) share in 2018 * Capital goods excl. aircraft, ship ** Raw materials exclude gold
Krungsri Research’s view
Merchandise exports slipped for the second consecutive month in December, by 1.7% YoY (vs -1.0% in November). For full-year 2018, exports grew
6.7% (vs +9.9% in 2017). The global economic slowdown is starting to create more visible impact, as reflected by: (i) broad-based deceleration across
export markets; and (ii) stronger signs the electronics export cycle has peaked. The drag from tariff uncertainty is intensifying as shipments to China
continue to slip. On a positive note, exports to the US continued to grow modestly led by front-loading of tire exports before the publication of
investigation results and possible anti-dumping measures. Shipments to ASEAN5 have strengthened, supported by rising domestic demand.
Imports shrank 8.2% YoY (vs +14.7% in November). This led full-year 2018 imports to grow 12.5% YoY. Excluding gold items, however, import growth
was flat at +0.1% (vs +17.5%). Import of capital goods (excluding aircraft, ship) continued to expand, suggesting investment outlook remains firm.
December trade balance showed a surplus of USD1.06bn, reversing from USD1.18bn deficit in November.
Risks to our 2019 export growth forecast (4.5%) remain broadly balanced. The outcome of trade negotiations remains uncertain, which means
exports will remain weak in the near-term. Exporters and importers will likely remain sidelined pending more clarity on a trade deal. Although it is
premature to conclude the US and China would eventually reach an agreement, close dialogue between the two countries at least indicates lower
risk of higher tariffs (threats to raise tariffs from 10% to 25%). We take a no-deal scenario as our base case. While the cooling global economy could
increase downside risk, positive sentiment arising from ongoing trade talks (or possibly a trade deal) offers upside risk.
Source: MOC, Krungsri Research
Krungsri Research 24Brighter prospects for Thai seafood exports after EU lifts
yellow flag, but impact should be limited
Apr’16: The government
Fishery product and canned & Jun’14: Thailand was Apr’15:
began to appoint the IUU
downgraded to Tier 3 Thailand
processed seafood (USD, bn) ranking of US’s receives yellow working group.
Trafficking in Persons flag as illegal Jan’19: EU lifted
Report (TIP report). fishing country. yellow flag on
Thailand
Jun’18: US upgraded
To ROW Thailand to Tier 2 in
TIP report.
To EU
6.94 6.99
5.95 5.95 5.65 5.60
4.97 5.16 5.44 5.48
1.07 1.19 1.05 0.98 0.76 0.52 0.47 0.43 0.41
0.40
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019F
15% 15% 13% 14% 12% 9% 8% 7% 7% 7%
Krungsri Research’s view
After being downgraded by the US and EU, Thailand’s seafood exports to the EU had tumbled from over USD1bn to USD0.4bn within five years. In
the most optimistic case, after the EU removed the yellow flag, Thai seafood exports to the EU would only return to pre-flag levels. However,
regardless of the IUU issue, Thailand still lacks comparative advantage, e.g. production cost is higher than its major competitors especially in
Vietnam, India and Ecuador. Because of the 5-year ban, there is high risk of Thailand losing the EU market in the longer term. All in, we are
cautiously optimistic about this positive development and expect Thai shipments of fishery products and canned & processed seafood to the EU
market to grow by 3-5% or USD395-410m.
Source: MOC, Krungsri Research
Krungsri Research 25Foreign tourist arrivals show strong recovery in December
after Chinese tourist numbers rebound to pre-crisis levels
Foreign tourist arrivals t-1 = 100 Chinese tourist arrivals in Thailand t-1 = 100
5.0 Million (LHS) % YoY (RHS) 30 120 (seasonally adjusted index) 120
25 2015 Erawan Shrine
4.0 3.8 110 2016 Zero-dollar tours ban 110
20
2018 Phuket tragedy
3.0 15 100 100
10
7.7 90 90
2.0 5
0 80 80
1.0
-5
70 70
0.0 -10
Jan-16
Jul-16
Jan-17
Jul-17
Jan-18
Jul-18
Apr-16
Oct-16
Apr-17
Oct-17
Apr-18
Oct-18
60 60
t-1 t t+1 t+2 t+3 t+4 t+5
High growth
Modest/Moderate growth Foreign tourist arrivals (% YoY)
Contraction
Oct-18 Nov-18 Dec-18
31.8
19.7 22.5 19.9 20.2
12.0 8.7 11.5 13.4 12.3
5.8 3.1 4.0 6.6 6.0
2.8 2.6 2.3 1.8 4.0 0.6 2.2
-4.0 -4.1 -4.8 -5.5 -8.2
-14.6
-19.8
-24.5
China ASEAN5 Europe* North Asia** CLMV India Russia US Australia Middle East
(27.5%) (16.3%) (13.8%) (13.5%) (10.5%) (4.2%) (3.8%) (2.9%) (2.1%) (1.9%)
Note: ( ) share in 2018 * Europe excludes Russia ** North Asia excludes China
Source: MOTS, Krungsri Research
Krungsri Research 26Headline inflation falls to 18-month low but core inflation
was stable in January
% CPI inflation Consumer Price Index: major categories
2.0
Consumer Price Index Weight 2018 2019
BOT target range 1-4%
1.5 (% YoY)* J F M A M J J A S O N D J
Headline CPI 100.00%
1.0 Food & beverages 36.13%
0.5 Apparel & footwear 2.88%
Housing & furnishing 23.25%
0.0 Medical & personal care 6.22%
-0.5 Transportation & communication 24.02%
Headline inflation Recreation & education 6.13%
-1.0 Tobacco & alcoholic beverages 1.38%
Core inflation Prepared food 17.02%
-1.5
Raw food 15.69%
Jan-15
Jul-15
Jan-16
Jul-16
Jan-17
Jul-17
Jan-18
Jul-18
Jan-19
Apr-15
Oct-15
Apr-16
Oct-16
Apr-17
Oct-17
Apr-18
Oct-18
Energy 11.75%
Core CPI 72.56%
* Green > 0%, Red < 0% / Darker green (red) indicates stronger (weaker) momentum
Krungsri Research’s view
Headline inflation continued to drop for the fifth month to 0.27% in January (vs 0.36% in December), in line with median consensus
forecast (0.26%). This is the lowest reading since July 2017, mostly due to larger drop in Energy inflation (-3.51% YoY vs -1.24% in
December). This also led to a larger decline in Transportation and Communication CPI (-1.92% YoY vs -0.65% in December). Food &
Beverage inflation rebounded to 1.34% YoY from 0.90% in December.
Core inflation (excluding volatile Raw Food and Energy components) remained steady at 0.69% (vs 0.68% in December), in line with
our and market expectations. Sequential momentum for core CPI was +0.03% MoM, rising for the ninth month in a row. Among core
components, CPI for Prepared Food, Housing & Furnishing, and Personal & Medical Care continued to rise.
Falling energy inflation will improve household balance sheets, and bolster underlying demand-pull inflation. Although falling
energy inflation will continue to drag headline inflation, it should help to improve household cash flows. Households nationwide
could save on energy costs because the energy bill accounts for 11% of total household expenditure (based on Socio Economic Survey
2013). This should strengthen underlying price pressure, and hence, we expect core inflation to continue to rise towards the end of
2019. We are keeping our 2019 inflation forecasts: headline inflation +1.1%, core inflation +0.9%.
Source: MOC, Krungsri Research
Krungsri Research 27MPC keeps policy rate for now, signals March rate hike
likely
# Votes MPC policy rate decisions % Topics Narratives
8 2.5
Financial The post-meeting statement noted financial conditions “had been
6 2.0 conditions accommodative and conducive to economic growth”, citing real interest
rates “remained at a low level” and private sector financing “continued
4 expanding”. The committee expressed little concern about the recent
1.5
strong baht, saying it was mainly due to “a weakening of the US dollar”.
2
1.0 Economic The committee showed stronger confidence in economic outlook,
0 noting growth was projected to “continue to expand close to its
Votes for Action
outlook
0.5 potential”, even though downside risks have “increased” stemming
-2 Votes Against Action from slowing merchandise exports (due to slower global growth, trade
Policy rate (RHS) protectionism, and down cycle for electronics exports). Tourism
-4 0.0
prospects were upgraded following “faster-than-expected recovery in
28-Jan-15
11-Mar-15
16-Dec-15
23-Mar-16
11-May-16
21-Dec-16
29-Mar-17
24-May-17
28-Mar-18
12-Dec-18
5-Aug-15
16-Sep-15
3-Feb-16
*22-Jun-16
3-Aug-16
14-Sep-16
8-Feb-17
5-Jul-17
*20-Dec-17
14-Feb-18
*16-May-18
*20-Jun-18
8-Aug-18
19-Sep-18
29-Apr-15
*16-Aug-17
*27-Sep-17
*6-Feb-19
10-Jun-15
4-Nov-15
9-Nov-16
8-Nov-17
14-Nov-18
Chinese tourist arrivals”.
Meeting
date
Domestic The committee confirmed that domestic demand “continued to
expand”. The description of private consumption was mildly upgraded.
demand
Note: * At least one MPC member was absent from the meeting The statement included “farm income” on top of non-farm income
when referring to improvements in income conditions which were
“increasingly broad-based”. The committee expected private
Krungsri Research’s view investment to “expand further” but projected “a slower pace” in public
As universally expected, the Monetary Policy Committee spending growth.
(MPC) voted 4-2 to leave policy rate at 1.75%, with one Inflation The description for headline inflation was downgraded, saying it was
member absent from the meeting. The MPC sounded “restrained by lower energy prices and subject to increased downside
risks”. But the committee continued to expect core inflation to “edge
upbeat on the outlook for the economy but acknowledged up”, along with “rising demand-pull inflationary pressures”.
increased downside risks, largely stemming from external
Financial The committee viewed the recent monetary policy normalization
uncertainties. “would help curb accumulation of vulnerabilities in the financial system
stability
The 4-2 vote suggests 65.6% chance of a March rate hike. to some extent”. But, it outlined broad financial risks that “still
warranted monitoring”.
Coupled with the hawkish tone of the post-meeting
statement, we continue to expect the current hike cycle to Forward The committee confirmed its “state-contingent guidance”, reiterating it
“would continue to monitor developments of economic growth,
conclude after the next 25bps rate hike in March to take guidance
inflation, and financial stability, together with associated risks, in
policy rate to 2.00% throughout the rest of 2019. deliberating appropriate monetary policy in the period ahead”.
Source: BOT, Krungsri Research
Krungsri Research 28Risk factor: Is the next recession on its way?
To answer this question, we employed “Markov Regime-Switching Model” to estimate risks of an economic downturn. The model captures
previous three recessions in 1997, 2008, and 2014. A probability above 40% indicates very high risk of a recession.
Probability of an Economic Recession in Thailand
Asian Financial Global Financial Technical recession
% Crisis in 1997 Crisis in 2008-09 in 2014 (Thai coup)
15.0 300%
280%
260%
10.0
240%
220%
GDP growth (%YoY)
5.0 200%
180%
160%
0.0
Output Gap 140%
120%
-5.0 100%
80%
Probability of Economic
Recession (RHS) 60%
-10.0 Threshold: 40% probability
of recession 40%
20%
-15.0 0%
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: NESDC, Krungsri Research
Krungsri Research 29Model captures three recessions, and can lead a recession
by two or three quarters
In addition, according to out-of-sample tests, the model is also able to give a warning signal two or three quarters before the start
of a recession. That implies the probability of economic recession can be a leading indicator in determining the health of the Thai
economy.
Probability for Thailand’s past recessions
Global Financial Crisis in 2008-09 Technical Recession in 2014
Probability of recession (RHS) Output gap Probability of recession (RHS) Output gap
3 quarters 2 quarters
% deviation of GDP ahead of recession Recession % deviation of GDP ahead of recession
from long-term trend % prob. from long-term trend % prob.
4.5 Very high risk 100% 4.5 100%
of recession
(prob.> 40%)
3.0 80% 3.0 Very high risk 80%
of recession
(prob.> 40%) Recession
1.5 60% 1.5 60%
0.0 40% 0.0 40%
Threshold: 40% probability Threshold: 40%
of recession probability
of recession
-1.5 20% -1.5 20%
-3.0 0% -3.0 0%
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14
Source: NESDC, Krungsri Research
Krungsri Research 30Recent development shows rising – but small – chance of
economic recession in Thailand
Probability of an economic recession in Thailand has continued to rise for a fourth quarter to 5.8%, but it remains well below the warning level
of 40%. However, the model suggests Thai economy will enter a period of slowing growth.
Current Probability of Economic Recession Thailand’s Business Cycle
% deviation of GDP Recession Recovery Prosperity Slowdown
from long-term trend
% deviation of GDP 10.0
from long-term trend % prob.
1.2 7.0% 8.0
6.2%
1.0 6.0
6.0%
0.8 4.0
5.0%
0.6
2.0
0.4 4.0%
0.0
0.2 3.0%
-2.0
0.0
2.0%
-0.2 -4.0
1.0% -6.0
-0.4
-0.6 0.0% -8.0
1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18
-10.0 1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
4Q18 3Q18 2Q18 1Q18 Output Gap (LHS)
Recovery Prosperity Slowdown Recession Output gap
Source: NESDC, Krungsri Research
Krungsri Research 31Economy will remain resilient to shocks
Our sensitivity analysis on both external and policy shocks revealed risks of a recession remains contained. Short-term external shocks and a
sharp rise in interest rates could increase chances of a recession, but the probability remains below 40%. To push the Thai economy into a
recession in the coming quarters, the global economy would have to shrink 1.7% from current level, which is unlikely in the near future.
Hence, although the probability of a Thai recession has inched up, Thailand is unlikely to see a recession until the latter half of next year, at
the earliest.
Probability of a Thailand recession in case of shocks
Policy Shocks External Shocks
(Thai policy rate jumps) (Global GDP tumble)
% prob. % prob.
100% 100% Global growth declines by
1.7% from current level in
90% 90% the next 4 quarters
80% 80%
70% 70%
60% 60%
50% 50%
Threshold: 40% probability Threshold: 40% probability
40% 40%
of recession Thai policy rate jumps to 4% of recession Global growth declines by
30% 30% 0.8% from current level in
the next 2 quarters
20% 20%
10% 10%
0% 0% 1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18
1Q19
2Q19
3Q19
4Q19
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18
1Q19
2Q19
3Q19
4Q19
Source: NESDC, Krungsri Research
Krungsri Research 32You can also read
