Author: Bandid Nijathaworn, ThaiBMA and IOD
Thailand is emerging from one of the worst floods in history.
The floods, which struck in the second half of last year, damaged key industries across the country, including agriculture and manufacturing, and brought on a sharp drop in output, with GDP growth for the fourth quarter of 2011 dropping to negative 9 per cent. Such a large drop in output reduced Thailand’s annual GDP growth to 0.1 per cent, making last year one of its poorest for economic growth.
The floods brought two key economic issues to the surface. First, it is evident that Thailand has become an important producer in the global supply chain: the floods caused disruptions in the production of cars, computer parts and electronics, which halted global supply and further weakened already anaemic global economic activity. Second, the floods showed that natural disasters are a major attendant business risk in Thailand. Both issues are important from a policy perspective and prompted an immediate government response.
To ensure continued growth and to allay investors’ concerns, the government set aside 350 billion baht (approximately US$11.6 billion) for investment in water management and flood-prevention programs to lessen the impact of future floods. A fund has also been created to address concerns about the rising costs of flood-related insurance. The implementation of both measures was necessary and timely.
The latest macroeconomic data suggest a steady recovery is taking place, but at a slower pace than anticipated. This is because flood damage was far more extensive than early assessments indicated, and the effects of a major supply shock generally unfold over a considerable period of time. Evidently, the decline in manufacturing output first observed in September 2011 is slowing: in February 2012, industrial capacity utilisation was almost back to its pre-flood level. It is expected that the ensuing supply bottlenecks could ease completely by the end of second quarter this year, setting the stage for a stronger rebound of economic activities thereafter.
The momentum of recovery appears to be stronger on the demand side because it is being driven by private consumption, increased government spending and high levels of private investment linked to businesses’ rebuilding activities. This year, Thai exports have been weaker, reflecting both a decline in global trade and a slow return of export orders, which had dropped over delivery concerns. Private consumption, on the other hand, has been buoyant, benefitting from liquidity fuelled by strong capital inflows, as well as flood-related tax allowances and subsidies. The surge in private consumption also benefitted from an easier monetary policy stance, with the Bank of Thailand lowering the policy rate twice since November 2011, to 3 per cent in March 2012. As a result, credit growth has been rapid, expanding by 15.5 per cent at the end of February, while consumer sentiment and investor confidence are also improving.
One consequence of the gap between rapid recovery on the demand side and slower supply-side normalisation has been a resurgence of inflation. Headline inflation increased to 3.4 per cent in March, while food-price inflation remained elevated at 7 per cent. Although price increases are to be expected during a period of economic recovery, the upward pressure on prices seems to have taken hold early and to be outpacing the strength of the recovery. Looking ahead, inflationary pressure will remain and even accelerate as the recovery continues to gather momentum and the flow-on effects of high oil prices and the recent increase to the minimum wage are felt across the Thai economy. Managing economic recovery while maintaining price stability and inflation expectations will be a key challenge for Thailand’s macroeconomic policy going forward.
There are three major threats to Thailand’s economic recovery. The first is the possible continued weakness of the global economy caused by problems in the euro zone, which could put further downward pressure on global and regional growth. Important in this context is the slowdown’s effect on Asia — especially on important regional players such as China, which is one of Thailand’s most significant trading partners. The second is a lack of continued private investment momentum beyond flood-related expenditure — private investment is necessary to put the economy back on the path toward strong multi-year growth. Government policy and public investment is critical to avert this type of risk, and it is expected that flood-prevention spending will foster investor confidence and lead private-sector investment. The third threat to Thai economic recovery is the domestic political situation, because resurfacing tensions could affect investor confidence and discourage private investment.
Notwithstanding these risks, the current market consensus for Thailand is positive and the rapid recovery is set to continue for the rest of 2012, with GDP growth estimates ranging between 4.8 and 5.0 per cent. Thailand’s economic recovery has been supported by the resilience of its economy and the ability of the government to respond with adequate policy when needed.