The world economy in the first quarter of 2023, especially in January, seems to be defying gravity. The US labour market and retail sales figures have been much better than expected, while inflation is showing signs of a slower-than-expected slowdown.
You probably have heard of hard and soft landings, but what is happening now is what some economists and strategists define as a "no-landing scenario". What that means is that the economy is still expanding despite rising interest rates, while inflation is still high, which will lead central banks, especially the US Federal Reserve to continue to raise interest rates.
We believe a no-landing scenario is unlikely to materialise, though inflation will still be the main risk. The INVX Global Inflation Study found that inflation in 18 out of 36 countries increased from the previous month. And the average inflation rate for the 36 nations surveyed started rising again in January. But we believe that some of the rise has been due to temporary causes.
For a start, we saw a sharp rise in commodity prices in January as a result of China's opening up and the market expecting more demand for commodities. Commodity prices in February have dropped a lot, and are now lower than at the beginning of the year. Despite that, we will keep an eye on inflation.
MANUFACTURING WEAK
We believe the global economic situation is likely to weaken in the near future. Despite a rising trend in purchasing managers index (PMI) figures in several countries, our study of manufacturing production indices (MPI) found slowing growth or contraction in 30 out of 42 countries. The average for the overall index is -0.9%, which is the same level as during the economic slowdown we saw before the Covid crisis began in early 2020.
The PMI is relatively "soft" data, acquired by asking purchasing managers about the state of their business compared to the prior month. The MPI is "hard" data, reflecting real activity in manufacturing sector; hence, we believe the global industrial sector will continue to slow down in line with the tight monetary policy direction.
Looking at the benchmark Fed Funds Rate, we believe it will reach 5.13% by May and remain at that level until November this year. This coincides with the Fed's view, reflected in the minutes of the most recent meeting of its rate-setting committee on Jan 31 and Feb 1, when most members thought a slower pace would be the best way to manage the risks of raising rates too much or too little. But the minutes also revealed that some officials were concerned about stopping or slowing their inflation-fighting campaign too soon.
If the Fed gradually but continuously raises interest rates, the Consumer Price Index CPI should gradually slow from the current level of 6.4% to 3.5% by the end of 2023. In this scenario, policy interest rates will be higher than consumer inflation by mid-2023, causing US monetary policy to enter a restrictive zone, which will exacerbate risks to the economy and/or the financial sector. We believe the Fed will finally have to cut interest rates by November.
EXPORT RISK
Looking at the Thai economy, our views are quite similar to the National Economic and Social Development Council (NESDC), which reported growth expanded by 1.4% in the fourth quarter of 2022, compared with a forecast rise of 3.5% in a Reuters poll, as exports and manufacturing declined, despite a rebound in the tourism sector.
The NESDC lowered its projection for Thai economic growth this year to a range of 2.7% and 3.7% from a previous forecast of 3% to 4%.
While we still believe Thai GDP will grow by 3% this year, export risks are large. We believe exports will be stagnant, but private consumption growth of 4.0% will be higher than the NESDC projection of 3.2%. We expect about 25 million tourists will enter the country, with average spending of about 47,000 baht per person, down from 52,000 baht last year.
We believe the "no-landing scenario" is unlikely to happen. Instead, the global and Thai economy may face the risk of high inflation, lower growth and higher interest rates for longer. Investors and businesspeople, be warned.
Dr Piyasak Manason heads the Wealth Research Department at InnovestX Securities Co Ltd.
