Thailand: Getting back on its feet Asia Pacific Economic Outlook, Q2 2016

Thailand seems to be recovering from the lackluster performance of 2014, though questions remain with regard to the rising tide of financial market volatility, slower growth in other Asian countries, and the results of a referendum on a new constitution.

Thailand’s economy bounced back modestly last year after a lackluster 2014. While a much-needed fiscal stimulus helped, a swing in investments appears to have dispelled some of the clouds of political uncertainty. Tourists also flocked back to the country, with arrivals going up by 20.5 percent. There are, however, some concerns as the economy charts its course this year. For example, the rising tide of global financial market volatility is likely to keep Thai policymakers on their toes. Slower growth in other Asian countries with strong links to Thailand through demand and supply chains could also put a spanner in the works. Most importantly, a referendum on a new constitution will be keenly watched, both within Thailand and outside. Investors, in particular, will be hoping that sound economics triumphs over uncertain politics in the years ahead. From recent trends, it appears their hopes may materialize.

The economy stays on track in Q4

Real GDP grew by 2.8 percent year over year in Q4 2015, marginally lower than the previous quarter’s rise (see figure 1). This took annual GDP growth for 2015 to 2.8 percent, the highest in three years. The economy benefitted from strong growth in government spending in Q4 (4.8 percent) due to fiscal stimulus measures. Investments also revived during the quarter, with gross fixed capital formation rising by 9.4 percent, the highest rate of growth in three quarters. Private consumption—a key growth driver in recent years—also accelerated in Q4 to 2.5 percent from 1.8 percent in Q3. Consumers appear to be benefitting from real income gains due to declining prices. However, with household debt high, consumers are likely to be more cautious than in the heady days of the credit-fueled growth of 2010–12.
Thailand_Figure 1. Real GDP expanded at a moderate pace in Q4 despite a contraction in exports

GDP growth would have been higher had it not been for the external sector. A slowdown in economic growth in key markets continued to weigh on Thailand’s exports in Q4. Exports contracted by 3.5 percent, the first contraction since Q3 2014 and the most severe since Q3 2009.

Slow growth in new markets is pulling exports down

Exports show no signs of recovering soon, with merchandise exports declining by 8.9 percent. Sales to major markets like Japan, the Association of South East Asian Nations (ASEAN), and the United States have all suffered in recent times (see figure 2). It is interesting to note that Thailand’s export markets have changed over time, shifting from the United States and the European Union to Asian markets like Japan, ASEAN, and China (see figure 3). Aiding this transformation is Thailand’s rise as a manufacturing hub (like for automakers), more integration within ASEAN, and the growing economic might of China. Strong growth in these markets helped shield Thailand’s exports when growth in the United States and the European Union slowed down after 2009. Now, with Asia also showing signs of strain, Thai exports are on shakier ground. Moreover, with production linkages spread across Asia through global value chains, any dent in demand in one country is likely to impact production and investments across the region, including Thailand.

Thailand_Figure 2. Merchandise exports fell in January at the sharpest pace since November 2011


Thailand_Figure 3. Changing shares of key markets in Thailand’s merchandise exports

With the baht depreciating, one would have expected Thailand’s exports to be more competitive. However, major Asian currencies, including those of key export competitors, have all been hit since 2015 (see figure 4), thereby nullifying any gain in competitiveness in Thailand’s exports due to a weak currency.

Thailand_Figure 4. The baht has weakened against the dollar, but so have other Asian currencies

With exports declining, manufacturing has been hit

Slowing exports also had implications for the manufacturing sector. For example, as merchandise exports fell in January, so did manufacturing output (see figure 5). With exports and manufacturing under pressure, capacity utilization has also edged down. In January, capacity utilization was 63.2 percent, nearly 10 percentage points lower than three years before. Less capacity utilization will, in turn, weigh on investment growth. Although, at 4.7 percent, annual growth in gross fixed capital formation in 2015 was the highest in three years, it was much lower than in 2012 (10.7 percent).

Thailand_Figure 5. Manufacturing output and capacity utilization are under pressure

Any succor from housing?

Construction rebounded in 2015 (15.8 percent) after contracting in 2014. Housing, however, is a different story despite a 39.8 percent year-over-year rise in residential construction permits in January. It is still too early to predict a strong housing sector in 2016 (see figure 6). House prices have gone up by just 0.4 percent since the beginning of 2015 after rising 26.7 percent between January 2009 and January 2015. While slow growth in prices will make housing more affordable, demand also depends on sustainable improvements in household income and wealth. As economic growth slowed in 2013–14, growth in nominal personal disposable income also went down (see figure 7).

Thailand_Figure 6. Growth in cement consumption and house prices indicates incipient growth in the housing sector


Thailand_Figure 7. Households are still grappling with high debt

Consumers will likely benefit from low inflation and a strong labor market

Fortunately for Thailand’s consumers, the labor market is healthy with unemployment (non-seasonally adjusted) at less than 1 percent in January 2016. But, despite a tight labor market, wage gains have slowed down (see figure 8). Instead, consumers are benefitting from real income gains due to declining prices. Headline inflation has been negative since December 2014, primarily due to declining prices of energy and raw food (see figure 9).




Despite negative inflation, it isn’t deflation

One might worry that the current trend of declining consumer prices is deflationary. However, demand and GDP growth trends reject that notion. The labor market is also firm. And although capacity utilization is down since 2012–13, the figures are still enough to quash any concerns of deflation. Most importantly, core inflation has remained positive during this period. No wonder then that the Bank of Thailand (BOT) kept interest rates on hold in its latest meeting, continuing with its accommodative stance, but not cutting rates further. The central bank expects consumer prices to firm up in 2016 as energy prices bottom out. However, it is unlikely that inflation will hit BOT’s target of 2.5 percent this year. The BOT’s greater worries stem from external factors, including the impact of any further weakening in China and the interest rate path in the United States. The BOT will be hoping that the rest of the year will be better than the beginning.