US economy still on path to recovery, BOT believes

BOT spokesman Chirathep Senivongs na Ayudhya said the risks to the US economy in the next period were the sluggish euro-zone economies and the expected slowdown of China’s economy. Nevertheless, if the US economy improves better than what the Federal Open Market Committee (FOMC) expects, it might consider raising the policy interest rate. 

“The market has assessed that Yellen’s comment on Tuesday was more dovish than expected, which has led to weakening of the US dollar,” he said.

Chirathep said the US economy slowed in the final three months of 2014 when compared with the third quarter. Private investment and consumption continued to expand but government spending slowed after the rapid acceleration in the previous quarter.

“The US economy slowed somewhat in January but that was partly because of the rapid acceleration in the previous quarter. The BOT believes that the US economy will continue to expand, backed by the labour market, which has continued to recover together with the improvement of the country’s financial situation, along with the gradual recovery of the housing sector,” he said.

David Goldman, managing director and head of Americas at Reorient Group, an investment firm in Hong Kong, said Yellen had made clear that any tightening of monetary policy would wait for unambiguous data showing sustained economic strength and higher inflation. 

 

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He said the most important tagline from Yellen’s remarks was her emphasis that the Fed must be “reasonably confident” that inflation will return to normal levels and even so, it will likely keep interest rates abnormally low for some time after that. 

“It’s hard to imagine how Yellen might have devised a more docile stance. In light of recent data, though, this should not be surprising. Both investment and consumption have disappointed by a big margin,” he said.

He said the US housing market was the biggest disappointment in the latest economic data. Both home sales and price increases were sluggish, with year-on-year changes in the 4-per-cent range, which was coming from a very low level.

Goldman said the US economy had the worst of both worlds, where the oil-price drop had crushed capital expenditure, but did not seem to have helped the consumer. 

Retail sales are down for two months running in nominal terms, and real retail sales also fell sharply in January.

Meanwhile, investment in the US is still exceptionally weak and durable-goods orders are down 1 per cent year on year in nominal terms while non-durable-goods purchases were down more than 7 per cent. Investment in the energy sector is also expected to drop along with all the sectors that depend on it, he said.

The preponderance of economic data coming in well below market consensus has pushed interest-rate tightening out to the indefinite future. Reorient still believes that the Fed will not hike its rates until the end of 2015 at the earliest, and possibly much later, Goldman said.

The UOB Global Economics & Markets Research team in Singapore still expects the Fed to normalise interest rates next quarter, possibly starting at the FOMC meeting in June. But it also believes that there are still significant uncertainties around the timeline and the risk is for the increase to be delayed, especially if there is a material deterioration in the external economic environment.