Outlook Quarter 3/2022

EIC revises the Thai GDP forecast for 2022 to 3.0% (from 2.9%) and anticipates 3.7% growth in 2023 due to recovering tourism and service sector momentum following the country reopening and more relaxed international travel measures throughout the globe. According to such factors,  with additional support from China’s border reopening anticipated since late 2022, EIC evaluates that the number of foreign tourists visiting Thailand should edge up to 10.3 million in 2022 and 28.3 million in 2023. Domestic tourism should also strengthen and return to the pre-COVID level in 2023. Given such circumstances, income from tourism and related services and private consumption shall continue to improve despite some pressure from high costs of living. In terms of inflation, EIC expects the rate to increase to 6.1% (from 5.9%). Even though the rate should gradually lower to 3.2% in 2023, inflation will still exceed the inflation target due to prevailingly-high energy and food prices in addition to higher cost passthrough from producers to more broadening products. Meanwhile, exports should slow following global economic slowdowns.

 

Thitima Chucherd, Ph.D., Head of Economic and Financial Market Research of the Economic Intelligence Center (EIC), stated that “Global economy showed clearer signs of slowdowns in both manufacturing and consumption activities throughout the globe in H1/22. Consumer confidence in various countries also fell close to the levels witnessed in the prior crises. Furthermore, given aggressive synchronous global monetary policy tightenings, escalating energy crisis in the Eurozone, troubling  Chinese economic conditions, and prolonged supply bottleneck, global economy during H2/22 and 2023 should continue to slow. With such regards, EIC downgrades the global GDP growth forecast in 2022 to 3.0% from 3.2% previously, with even slower growth at 2.7% anticipated in 2023. Most importantly, EIC views that some economies may fall into recession by late 2022 to 2023, including the UK, the Eurozone, and the US. However, such recessions should be mild due to some cushions from private sector’s strong financial position and buoyant labor market recovery.”

 

Furthermore, Thitima added that “The painfully high global inflation has peaked in Q3/22 and should somewhat decline during late 2022 following lowering commodity prices and easing supply bottlenecks. Despite such deceleration, EIC views that global inflation is expected to remain above the central banks’ target during the next 1 – 2 years as energy, food, and durable goods supply recovered slower than previously anticipated. Furthermore, wages remain high in line with the strong labor market recovery. With such conditions, central banks should continue to tighten monetary policy to control inflation. Meanwhile, escalating global geopolitical risks warrant close monitoring and careful handling as tensions could worsen global supply chain recovery. In the base case, EIC views that the tensions between China and Taiwan will remain at status quo with limited short-term impacts on the global economy. However, the decoupling between the US and China will speed up, especially in technology. With heightening geopolitical risks in the periods ahead, multinational corporations will start to adjust their production processes, resulting in 4 main issues: (1) Lower international trade and investments, (2) Reallocating production bases within region or reshoring to the country, (3) More production for inventories, and (4) Lower reallocation in international resources.”   

 

Somprawin Manprasert, Ph.D., First Executive Vice President, Chief Economist of the Economic Intelligence Center (EIC), and Chief Strategy Officer at the Siam Commercial Bank PCL, stated that “EIC revises up the inflation projection this year and views that inflation will continue to remain above the inflation target range next year. Such conditions will undermine domestic purchasing power and consumption as well as pressure on businesses’ costs and investments. Looking ahead, the Thai economy remains somehow vulnerable. Some groups of household and business experience slower income growth compared to their expenses, in particular low-income households and small businesses. Even though the government plans to raise the minimum wage on average of 5% by late 2022, the minimum wage increase cannot keep up with the accumulated inflation since the last minimum wage hike in 2020. As such, minimum wage workers will face with decline in real income. Meanwhile, businesses will experience wage cost increase as foreign workers that left Thailand have not fully returned yet. Furthermore, policy rate hikes by central banks in major economies and Thailand will increase costs of financing and exacerbate economic scars from the COVID crisis.”

 

To sum up, EIC expects that the Thai economy will be increasingly reliant on tourism and services instead of export-oriented manufacturing and investment. However, domestic consumption recovery would still face downward pressures from the slow and gradual inflation softening until 2023 amid fading government economic stimulus. As such, the Thai economy will gradually recover. GDP is unlikely to return to pre-pandemic levels until Q2/23. Furthermore, the country’s negative output gap could persist until late 2024. Given such scenarios, the MPC should gradually raise the policy rate at the next 2 meetings (25 bps per time) in September and November. The policy rate, then, should stand at 1.25% by 2022 year-end with a probability of 3 additional hikes (25 bps per time) to 2% by 2023 year-end to gradually normalize monetary policy to the level in line with long-term economic growth path.

 

Meanwhile, factors that will continue to depreciate the baht include 1) The strengthening US dollar in line with the Fed’s monetary policy tightening and concerns of global recession, 2) Weaker-than-anticipated Chinese economic performance, prompting the Chinese yuan, in addition to the Thai baht and regional currencies to weaken, 3) Capital outflows from EMs and Thailand from risk-off sentiment, and 4) Thailand’s current account deficit. However, the baht should start to appreciate in late 2022 to 2023 due to 1) The strong economic recovery in Thailand, 2) Anticipated Thai current account surplus by the end of 2022 (EIC estimates that the current account surplus will stand at 1.5% of GDP in 2023), 3) Capital inflows to the Thai financial market from strengthening investor confidence, and 4) Thai inflation dropping faster than US inflation. As a result, the Thai baht will likely strengthen to 35-36 baht/ USD by the year-end and to 33.5-34.5 baht/ USD by 2023 year-end.

 

Somprawin’s closing remarks highlighted that “The Thai economy still faces significant downside risks from (1) Heightening global economic risks, especially in the US and Europe that will weigh down export and investment prospects, (2) Weaker-than-anticipated Chinese economic performance caused by China’s Zero-COVID strategy and elevated debt in real estate sector, (3) high inflation environments from rising commodity prices with implications on household purchasing power and business costs, and (4) Political uncertainties that could hinder confidence in production and investment. As such, government support remains vital for vulnerable groups. Meanwhile, fiscal constraints prevail in terms of size and timing due to the phrase-out spending from the THB 500 billion Emergency Decree. Going forward, government support is anticipated to be more targeted.”