Outlook Quarter 2/2022

EIC revised up the Thai economic growth forecast from 2.7% to 2.9% in 2022, as Thailand's reopening ushers a rebound

EIC revised up Thailand's 2022 GDP growth forecast to 2.9% (from the previous 2.7%). The upward revision was attributed to a rebound in the tourism and service sector, backed by Thailand’s reopening and easing border restrictions worldwide. We thus expect Thailand to welcome 7.4 million foreign tourists this year, up from the previous estimation of 5.7 million. On a domestic front, economic activities in the service sector should pick up pace as people begin to spend more time outdoors, given higher inoculation rates and easing lockdown rules. The agricultural sector would be another growth driver this year. Crop yields are poised for buoyant growth, and farm product prices tend to improve alongside rising global food prices—driven by supply-side pressures from an ongoing war in Ukraine and Western sanctions on Russia. Nonetheless, rosy domestic spending—buoyed by a rebound in the tourism and service sector which is the primary source of employment, rising farm income, and pent-up demand from higher-income households—would still face downward pressures from soaring inflation which is now underway to its 24-year high (EIC expects annual average headline inflation at 5.9%), whereas exports will likely lose pace in tandem with the global economic slowdown going forward.

The global economy in 2022 is poised for slower growth than the previous year, hampered by higher pressures from 3 critical risks: (1) The Russia-Ukraine war would prompt a worsening and persistent supply chain bottleneck while keeping commodity prices at historical high—especially energy and food costs; (2) Lockdown and stringent virus control measures due to China’s Zero-Covid policy would pressure on domestic spending and exacerbate global supply chain disruptions since China is one of the world’s largest manufacturers and global logistics hub; and (3) Monetary tightening among major central banks in hope to quell inflation would, in turn, retard global economic growth and fuel volatility in global financial markets. EIC expects the US Federal Reserve (Fed) to make policy rate hikes at every meeting throughout the rest of 2022 (seven rounds in total in 2022)—possibly with a 50-bps hike in each of the next three meetings, resulting in the fed funds rate reaching 3% by the end of this year. The Fed has also kicked off its quantitative tightening in June. EIC thus downgraded our global economic growth forecast to 3.2% in 2022, from 5.8% in 2021, following a synchronized slowdown in major economies—namely the US, Europe, and China. That is to say, the global economy will soon enter the post-pandemic era of instability where many countries are facing higher risks of economic recession.

The global economic slowdown and rising uncertainties ahead will weigh down on exports, which have been the major driving forces for the Thai economy. Thai exports should witness slower growth amidst shrinking demand from trade partners alongside the global economic and trade deceleration. In particular, the Chinese market currently faces hindrances from stringent virus control measures and economic restructuring, whereas European counterparts are confronted with the ongoing war in Ukraine. Slower exports would hamper the private investment that still grapples with supply chain disruption and soaring raw material costs. As for the government expenditure, despite an expanding public construction led by the mega-project progress, we expect a smaller impetus since only THB 48 billion remained to be disbursed for new projects under the THB-500-billion Emergency Decree.

EIC anticipates the annual average inflation at 5.9% in 2022 (up from the previous 4.9%), the highest in 24 years. With the government withdrawing subsidies on living costs, there will be downward pressures on domestic purchasing power, household consumption, as well as private investment. Based on our analysis, household income should pick up more slowly since the labor market has not yet regained its full momentum, and that would become a big hindrance for households to wrestle with their rising costs of living this year. Particularly, over 7 million or one-third of Thai households whose income was already insufficient for their spending would find this inflationary episode more challenging. Such circumstances would impair their balance sheet due to shrinking liquidity and ballooning debt burden--since some households might seek loans to cover the rising cost of living, thus further exacerbating Thailand's household vulnerability. Apart from that, the business sector would face constraints in passing on rising costs to consumers, particularly among discretionary goods.

As for the monetary policy outlook, we expect the Monetary Policy Committee (MPC) to raise Thailand’s policy rate to 0.75% in 3Q/22 in response to inflation surges and an upbeat outlook on economic recovery following Thailand’s reopening. Policy rate hikes would help cushion risks on price stability and curb escalating inflation expectations. In May 2022, the median one-year-ahead inflation expectation among households climbed to 3.1%, whilst Thailand's current real interest rate (inflation-adjusted) remained negative and relatively low compared to those of neighboring countries. This might result in capital outflows from Thailand followed by a weakening Thai baht. Still, we expect the MPC to gradually wind down its ultra-easy monetary policy in order to buttress the fragile economic recovery amidst the lasting economic scars: stagnant unemployment, subdued income, and high household debt burden. Similar to other regional currencies, the Thai baht has weakened by 3.6% against the greenback from the beginning of 2022 until June 7, along with the recent depreciation trend among its peers. In the short term, EIC views that the baht will likely fall to 34.5-35.5 against the US dollar, given downward pressures from Fed rate hikes and war-induced risks. However, the year-end baht should bounce back slightly with support from an economic rebound and improving current account balance—ushered by the service account. As a result, the Thai baht will likely strengthen to 33.5-34.5 against the greenback at the end of 2022.

To sum up, EIC expects that the tourism and service sector will replace the export-oriented manufacturing as a major economic driver in the period ahead, backed by the country reopening to foreign tourists and lockdown easing. Nonetheless, a rebound of domestic spending would face headwinds from accelerating inflation—which is likely to stay elevated throughout the remainder of 2022, given a limited policy space and persistent economic scars. Hence, Thailand’s economic growth will witness a modest rebound this year. Thus, the annual GDP is unlikely to return to its pre-pandemic pace (in 2019) until Q3/23. Apart from that, there remain significant downside risks ahead from (1) Persistently high energy and commodity prices amidst the prolonged war in Ukraine; (2) Supply chain disruption in the manufacturing and logistics sector caused by China’s Zero-Covid strategy, which might prompt a further reimposition of lockdown; (3) Supply chain decoupling fuelled by geopolitical factors could undermine productivity and exacerbate the rising trade and investment costs for the manufacturing sector; (4) Soaring costs of living might aggravate scarring effects, thus broadly damaging the household’s debt serviceability; and (5) Government relief packages would soon peter off, both in terms of economic stimulus and subsidies to help with the rising living costs—particularly for energy prices.



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