Market expectations were jolted earlier this month when the US job market created only 114,000 openings in July, while the unemployment rate rose to 4.3 per cent, the highest since October 2021.
The disappointing figures led to market sell-offs around the world with key US stock market indices — the Nasdaq Composite, the S&P 500 and the Dow Jones Industrial Average — dropping sharply by 2.43 per cent, 1.84 per cent and 1.51 per cent, respectively, on Friday (August 2).
On August 5, Japan’s stock market fell sharply as the Nikkei 225 index plunged 12.4 per cent, the worst day for the index since “Black Monday” 1987, while the broader-based Topix also saw a rout, tumbling 12.23 per cent.
Previously the US Federal Reserve (Fed) had often claimed that the US economy was resilient and the job market was solid, despite the higher interest rates. But the latest non-farm payrolls stoked concerns over the job market and the overall US economy, which might not make a soft landing as expected.
Many critics raised concerns and pointed to the rising unemployment rate of 4.3 per cent, a near three-year high, which triggered something known as the "Sahm rule".
Named after American economist Claudia Sahm, the rule says that if the average unemployment rate over three months is half a percentage point higher than the lowest level over the past 12 months then the country is at the beginning of a recession.
In this case, the US unemployment rate rose in July, so the three-month average was 4.1 per cent.
That compares to the lowest level over the last year of 3.5 per cent.
However many analysts, including Sahm, do not think the US economy is in a recession and argue that the market sell-off was an overreaction.
This narrative has contributed to the recent rebounding of the global stock market, including the Stock Exchange of Thailand.
Though global stocks led by Wall Street have recovered recently, uncertainty remains, according to economists and market analysts.
Nobel Prize-winning economist Paul Krugman wrote in The New York Times that the US economy was looking pre-recession and the Fed should have cut the rate in their last meeting.
He warned that if the Fed moved slowly, unemployment could accelerate later.
Markets expect the Fed to make an aggressive cut of 50 basis points, up from 25 basis points projected earlier, at their September meeting.
The US central bank kept rates unchanged at 5.25-5.50 per cent, the highest in 23 years, as the Fed wanted more evidence of continuing inflation slowdown.
But many critics are worried that the Fed may be behind the curve, having waited too long to cut the rate, pointing to an economic slowdown.
Nassim Taleb, former options trader and author of the best-selling book, the “Black Swan”, argued that the worrying issue was the high debt in both Japan and the United States.
The yen carrying trade is a catalyst while the root cause is that Japan’s economy has almost no growth as Japan becomes an aged society, Taleb told CNBC in an interview recently.
The unwinding of the yen carry trade is also blamed for Japanese stocks plunging on August 5.
The yen carry trade is the practice of borrowing Japanese yen, at a very low interest rate, and using the loans to invest in US dollar-denominated assets that offer higher returns.
When the Bank of Japan raised the policy rate and data pointed to a weakening of the US economy, many investors unwound their positions.
Some critics think that high debt in developed countries, such as Japan and the US, pose threats to their economies.
Public debt in Japan accounts for more than 250 per cent of gross domestic product (GDP) while it is 120 per cent in the US.
Some say that Japanese public debt is not as perilous as gross debt, as Japan has large overseas assets and international reserves.
US recession a threat to Thai recovery
Supavud Saicheua, advisor to Kiatnakin Phatra Financial Group, worries that should the US economy suffer from recession it would hurt Thailand’s exports, as the US is one of Thailand largest export markets.
Exports are a key driver of the economy, and if exports do not grow the economy may not recover in the second half of the year as expected.
A recession in the US would weaken the dollar and strengthen the baht, making Thai products and services more expensive in the global market, hurting their price competitiveness.
Thailand is export dependent, as the export of goods and services are estimated to make up 69 per cent of GDP this year, according to the Fiscal Policy Office.
Thailand’s economic growth was slower at 1.9 per cent in the first quarter due partly to slower recovery of exports. The Bank of Thailand forecast a full year GDP growth of 2.6 per cent, driven by government spending, tourism and exports.
The value of goods exports is projected to expand 1.8 per cent this year up from minus 1.7 per cent last year. The number of foreign tourists are estimated at 35.5 million up from 28.2 million last year.
Global conflict and Thai economy
Economists are also closely monitoring developments of conflicts in the Middle East, fearing the Gaza war could escalate after Israel killed Hamas’ leader in Teheran and several commanders of Hezbollah in Lebanon, proxies of Iran. Iran has vowed to retaliate against Israel.
The escalation could cause oil and gas prices to shoot up, which would adversely impact Thailand’s economy, as it largely depends on imported energy.
The escalation of the Russia-Ukraine war has the potential to push up oil prices.
Impact of US-China trade tensions on Thailand
Many economists are also worried about the impact of US-China trade tensions that would have an impact on global and Thai economies.
Supachai Panitchpakdi, a former director-general at World Trade Organization (WTO), sees a multipolar world as consistent with the multilateral trade system of the WTO, while decoupling or deriding are subsets of the system.
“The bad news is that decoupling comes with trade restrictions,” said Supachai referring to the United States and Europe imposing barriers against Chinese-made products and from other countries.”
“American businesses who import Chinese products do complain about trade restrictions hurting their business and US consumers,” he said.
Supachai said that when he was at the helm of the WTO from 2002-2005, he supported the Chinese government’s handling of their economy.
Supachai said he used to tell Chinese policymakers that they should become themselves in terms of economic development and they should act to balance the US economic power.
However, Thailand will gain some benefits from the trade tensions, as some investors are relocating their factories from China and investing in Thailand and other countries.
