SCB EIC has revised down Thai economic growth forecast in 2026 to 1.4% (from 1.8%), reflecting the impact of the Middle East war, which has led to a rapid increase in energy and commodity prices. Headline inflation is expected to accelerate significantly above the BOT’s target range, averaging 3.2% for the year.

Domestic spending is projected to slow, particularly private consumption, which is likely to be constrained by weakening household purchasing power and declining consumer confidence amid rising energy and food prices, as well as a contraction in real income. Meanwhile, the business sector will face mounting pressure from higher costs and narrowing profit margins, prompting firms to delay investment due to heightened uncertainty.

Macroeconomic stability is also expected to become more fragile, reflecting increasing risks of a current account deficit, capital outflows, and a widening fiscal deficit, resulting in a “triple deficits” scenario.

The escalation of the Middle East war into a “Dual crisis” scenario, under the baseline case, is expected to persist for around two months.

The escalation of the war in the Middle East has significantly disrupted oil and gas shipments through the Strait of Hormuz, which accounts for around 20% of global supply, resulting in a sharp surge in energy prices. Meanwhile, attacks on energy infrastructure in the region have heightened market concerns over the risk of prolonged disruptions to energy supply, which may require an extended period to recover. At the same time, countries worldwide are likely to accelerate efforts to secure additional energy sources to offset declining reserve levels. Such supply- and demand-side pressures will prevent global energy prices from declining quickly, even after the war ends.

SCB EIC assesses three scenarios for the Middle East crisis:

1.       Baseline scenario: The conflict is expected to end within two months, with average Brent crude prices in 2026 projected at USD 85 per barrel.

2.       Adverse scenario: The conflict could be prolonged for four months, accompanied by significant damage to energy production facilities and infrastructure. In this case, average Brent crude prices in 2026 are projected at USD 105 per barrel.

3.       Severe scenario: The conflict lasts more than four months and spreads across the region, with more Middle Eastern countries becoming involved and major damage to energy facilities and infrastructure. Under this scenario, average Brent crude prices in 2026 could rise to USD 120 per barrel.

In addition to causing a sharp rise in global energy prices, the conflict is also expected to increase both the cost and volatility of land, maritime, and air transport. As a result, this energy crisis could have broader effects than previous episodes, evolving into a “two-sided crisis” driven by both higher energy prices and shortages of upstream inputs for key industries such as plastic resins, fertilisers, pharmaceuticals, and metals.

Thailand’s economy could expand by only 1.4%, reflecting its high dependence on energy imports, low energy efficiency, and pre-existing structural fragilities in the economy.

SCB EIC assesses that the Thai economy faces high risks from accelerating energy prices, given Thailand’s substantial net imports of oil and natural gas—equivalent to around 8% of GDP—together with the relatively high share of energy in the inflation basket at approximately 12–13%, and persistently low energy efficiency. The impact of the war is therefore expected to push the Thai economy into stagflation, characterised by slowing growth alongside rising inflation, and could further undermine macroeconomic stability through widening deficits across three key dimensions: the current account deficit, capital account deficit, and fiscal deficit.

The main transmission channels of these impacts on the Thai economy are as follows:

(1)     External sector: The trade sector will be adversely affected by a deterioration in terms of trade (the ratio of export prices to import prices). Import values are expected to accelerate significantly due to sharply higher energy import prices, while exports will be constrained by a weaker-than-expected global economic outlook and potential supply disruptions. As a result, the trade balance is projected to deteriorate markedly, with the current account likely to return to a deficit.

(2)     Tourism sector: The overall number of international tourist arrivals to Thailand is expected to slow, reflecting a likely reduction in flight frequencies, rising travel costs in line with accelerating oil prices, and heightened concerns among tourists regarding the global economic outlook. Early signs of declining arrivals from the Middle East and Europe have already emerged, although this trend will be partly offset by continued support from high-potential growth markets such as China and India. Overall, SCB EIC has revised down its forecast for foreign tourist arrivals this year from 34.1 million to 33.2 million.

(3)     Private consumption: Private consumption is expected to slow in response to rising living costs in line with higher global energy prices, further weighing on the recovery of household spending, which continues to face persistent economic scarring. These include fragile labour market, slow household income growth, and elevated household debt burdens.

(4)     Business sector: Businesses will face higher production costs and shortages of raw materials, disrupting supply chains and exerting downward pressure on profit margins. Heightened uncertainty and higher costs are also expected to lead some firms to delay new investment.

(5)     Financial markets: Financial markets are expected to experience heightened volatility, with capital outflows exerting rapid depreciation pressure on the baht and contributing to a larger capital account deficit. In this context, the BOT may need to intervene in the FX market through the use of international reserves to prevent excessively rapid baht depreciation.

Amid a prolonged war scenario, SCB EIC assesses that headline inflation this year under the base scenario is likely to rise above the BOT’s target range to 3.2%, up from the previous projection of around 0%. Inflationary pressures are expected to emerge initially from the energy and logistics components, before gradually broadening to goods affected by shortages of production inputs, packaging materials, and general consumer products.
Nevertheless, forthcoming government measures—particularly the Oil Fuel Fund mechanism, which is likely to require government guarantees for debt repayment under a higher borrowing ceiling—together with other support measures, will help cushion domestic impacts to some extent. However, policy support will be more limited than in the past due to Thailand’s public debt approaching the 70% ceiling, prompting authorities to remain cautious about sovereign credit rating risks. In addition, tax revenue collection may be adversely affected by the weaker economic outlook, which will further widen Thailand’s fiscal deficit.

Monetary policy faces increasing challenges from stagflation pressures, as slowing economic growth coincides with rising inflation. At the same time, energy price measures should avoid broad-based price subsidies or blanket price controls. Instead, policy should prioritise more targeted interventions and support gradual adjustment by consumers to higher energy costs.

The MPC is likely to maintain the policy rate at 1% this year. SCB EIC assesses that the MPC will not raise the policy rate in response to higher inflation, as inflationary pressures are expected to be driven primarily by supply-side factors. In addition, businesses may face limited ability to pass on higher costs to consumers amid still-weak demand conditions. A rate hike could therefore further weigh on Thailand’s already subdued growth outlook and exacerbate existing vulnerabilities stemming from elevated household and SME debt burdens.

At the same time, a policy rate cut while inflation is expected to exceed the monetary policy target range could raise concerns regarding the BOT’s commitment to the inflation-targeting framework and may contribute to more rapid baht depreciation, thereby adding further inflationary pressures. Moreover, the effectiveness of additional rate cuts in supporting economic activity would likely be limited, given the already low level of interest rates and heightened economic uncertainty. The MPC is therefore expected to preserve remaining policy space for use when necessary and when there is greater clarity regarding the outlook for growth and inflation.

Nevertheless, the MPC may consider one additional rate cut later this year if the impact on GDP turns out to be significantly more severe than currently assessed. In parallel, the BOT intends to deploy targeted measures to enhance the effectiveness of monetary policy transmission, including debt restructuring measures, soft loan programs, and credit guarantee schemes.

A policy response should shift from blanket support to the 3T framework: Targeted, Temporary, and Transform.

Prolonged blanket energy price subsidies at artificially low levels would impose a substantial fiscal burden, exacerbate inequality—since higher-income households typically consume more energy than lower-income households—and weaken incentives for energy conservation. Such measures would also contribute to a marked deterioration in the trade balance and increase the risk of a sharp and rapid adjustment in energy prices later on, which could in turn trigger an abrupt economic slowdown.

The government should adopt the 3T framework—Targeted, Temporary, and Transform—to manage short-term risks while strengthening long-term resilience, as follows:

1) Targeted: Provide support to the most severely affected groups through targeted subsidy measures for low-income households, farmers, and public transport operators, in order to mitigate hardship more effectively and precisely.

2) Temporary: Manage energy prices under a managed float approach by allowing prices to adjust gradually in line with market conditions. This would give consumers time to adapt while reducing fiscal risks associated with prolonged price distortions.

3) Transform: Use the crisis as an opportunity to strengthen energy security by incentivizing private sector investment in renewable energy and improving energy efficiency. These measures would help stimulate the economy in the short term while enhancing the long-term stability of the energy system.

The global economy is expected to slow as a result of the war, while heightened inflationary pressures are likely to prompt the Fed to postpone rate cuts until late this year.

SCB EIC assesses that, under the base scenario, global economic growth in 2026 will slow from 2.7%YoY to 2.5%YoY, reflecting the impact of the war, which has raised production costs and caused shortages of key manufacturing inputs, thereby exerting upward pressure on global inflation. Economies with high dependence on energy imports, particularly in Asia, are expected to be more severely affected.

On monetary policy, major central banks are likely to adopt a wait-and-see stance amid heightened uncertainty. SCB EIC expects the Fed to postpone its rate cuts to Q4, with only one 25-bps cut anticipated this year, given the likelihood of rising inflationary pressures.

Full report is coming soon

Key highlights

· Thailand’s economy in 2026 is expected to grow by only 1.5%, the lowest in three decades (excluding crisis years), down from 2% in 2025.  Main pressures come from external factors: global economic slowdown, trade wars, and intensifying foreign competition, as well as structural constraints at home, including household and business fragilities, weak  purchasing power, and fiscal constraint amid political uncertainty. Urgent structural reforms are essential to create new growth engines, raise economic potential, and build resilience against rising volatility.

· 7 questions shaping Thailand’s economy in 2026

1. How will trade wars and external competition affect Thailand? Exports risk contracting by 1.5% due to U.S. tariffs, tougher global competition, and global economic slowdown. Tourism  will grow about 4%, but still  far below pre-COVID levels, challenged by intensifying tourism war in Asia, a stronger baht, and safety concerns amid escalating border tensions.

2. What risks will weigh on private consumption? Wage growth remains slow amid fragile labor markets and weak consumer confidence. Household debt-to-income ratios remain high, and debt service repayment risks are spreading to middle- and high-income groups. Households are likely to cut spending while debt deleveraging continues.

3. Can private investment expand amid mounting uncertainty?  Private investment is expected to grow modestly, mainly supported by foreign investment flowing into new industries supported by BOI incentives. However, these investments will have a high import content, limiting their short-term domestic benefits and potentially increasing the risk of U.S. transshipment tariff in the future. Meanwhile, Thai businesses’ investment in machinery and construction will keep contracting due to weak demand and low capacity utilization.

4. Will tight financial conditions improve? In 2025, even though the Monetary Policy Committee cut the policy rate, financial conditions tightened significantly as household and SME lending contracted and the baht strengthened sharply. For 2026, EIC expects the policy rate to be reduced to 1% in the first half of the year to support the economy by lowering financing costs, easing pressure on the baht, and lifting inflation, which is likely to stay below target. However, access to credit for households and SMEs will remain challenging because their financial positions are still fragile amid heightened economic uncertainty, prompting banks to remain cautious in lending. Government measures will therefore be crucial, such as debt restructuring support for households, soft loans, and credit guarantees for SMEs. The success of these financial measures must go hand-in-hand with policies to boost household income and strengthen SME competitiveness.

5. How will political uncertainty affect fiscal policy and the economy? An early dissolution of parliament, ahead of the original timeline, would likely result in lower-than-usual disbursement of investment expenditure in FY2026 but could help reduce delays in the enactment of the FY2027 Budget Act. Nevertheless, political uncertainty remains elevated, while medium-term government spending will face increasing constraints amid pressure to implement fiscal reforms aimed at reducing the budget deficit and containing public debt. These will be key priorities for the new government in restoring confidence in Thailand’s credit rating and ensuring long-term fiscal sustainability.

6. Structural reform is the way forward, but how sustainable will it be? The Thai economy stands at a critical turning point, facing mounting pressures on multiple fronts. Structural reform is an unavoidable solution for the country. The government must build on existing initiatives and accelerate concrete economic reform policies in earnest. With a focus on long-term policies to enhance the country’s competitiveness, the strategy emphasizes upgrading business support measures and restructuring the economy in partnership with the private sector, for example, removing investment barriers and promoting high-potential industries through a reform platform in collaboration with businesses socalled ‘Reinvent Thailand’.

7. Which businesses can move forward, and how should they adapt to survive? Thai businesses will face five key challenges: global supply chain volatility, fragile household purchasing power, policy uncertainty, intense competition both  domestically and internationally, and pressures from  fast-moving megatrends. Overall, business  activity  in 2026 is expected to remain subdued. However, subsegments that can adapt and manage these risks effectively will  have opportunities to grow and leverage.  Examples include businesses that adopt new technologies to create added value, those that respond to changing consumer behavior and sustainability trends, and those that tap into markets with strong growth potential.

· The global economy is expected to slow next year as the impact of U.S. tariff becomes more pronounced.

o  SCB EIC expects global economic growth to slow to 2.5% in 2026 (from 2.7% this year). The key drag will come from U.S. import tariff measures, which will weigh on global trade following a period of front-loading. Nevertheless, the global economy will continue to gain momentum from AI-related investment, particularly in the U.S., as well as from accommodative monetary and fiscal policies, despite increasingly policy constraints.

o  The Fed’s policy rate is expected to decline further next year,  but additional cuts may be limited by inflation concerns . The Fed is likely to cut rates by another 50 bps, while the ECB is expected to keep rate low at 2%. In contrast, the BOJ is projected to gradually raise rates to around 1% by mid-2026.
 

Why might Thailand’s economy in 2026 record its lowest growth in three decades (excluding crisis periods)? SCB EIC explores the answer through seven key questions.

SCB EIC projects Thailand’s economy to expand by only 1.5% in 2026, down from 2% in 2025, the lowest growth in three decades (excluding crisis years). This outlook reflects mounting external pressures, including the escalating trade war and intensifying foreign competition in both goods and tourism, as well as rising domestic vulnerabilities among households, businesses, and fiscal policy constraint. These challenges, compounded by long-standing structural issues, underscore the urgent need for Thailand to accelerate a serious overhaul of its economic model.

 

Seven key questions shaping the direction of Thailand’s economy in 2026

1. How will the trade war and external competition affect Thailand?

Although Thai exports are expected to record strong growth in 2025, they are likely to contract in 2026 due to several key factors: (1) signs of a global economic slowdown amid elevated trade uncertainty and the increasingly evident impact of U.S. tariff measures; (2) the fading effect of front-loading, following the implementation of higher U.S. import tariffs since August this year; (3) rising risks of additional U.S. tariffs, particularly on electronics and transshipped products; and
(4) intensifying competition from China after the U.S. and China reached a one-year trade agreement to temporarily reduce retaliatory tariffs, enabling Chinese products to regain market share in the U.S. market. In addition, both Thai exports and imports remain exposed to potential delays in the outcome of trade negotiations with the U.S., amid escalating border tensions with Cambodia and heightened political uncertainty following the early dissolution of parliament.

In 2026, foreign tourist arrivals to Thailand are expected to increase to around 34.1 million, up from 2025. However, the recovery of Chinese tourists will likely remain gradual. Intensifying tourism competition across Asia, the so-called “tourism war”, together with the prolonged Thai-Cambodian border conflict, will pose significant challenges to the continued recovery of Thailand’s tourism sector.

2. What risks will weigh on private consumption?

Private consumption is expected to continue slowing in 2026 due to several factors. Household income recovery remains sluggish amid a more fragile labour market, as reflected in declining employment and working hours. According to the SCB EIC Consumer Survey 2025, households continue to experience income growth that lags behind rising expenses, particularly among low-income groups. Meanwhile, debt burdens remain elevated, and repayment risks have begun to spread to higher-income segments. In addition, non-performing loans (NPLs) remain persistently high, prompting households to reduce spending in order to deleverage debt, a trend that will continue to weigh on consumption going forward.

3. Can private investment expand amid mounting uncertainty?

Private investment is expected to expand in 2026, though growth will remain modest. Key support will come from the rising value of investment promotion applications approved by the Board of Investment (BOI) and the emergence of new investment drivers in high-potential industries such as data centres, electrical appliances and electronics, and the automotive sector — particularly those serving the ASEAN market. These developments will help Thailand maintain its position as part of the global manufacturing base. However, the positive spillovers from investment to the overall economy are likely to be limited, as Thailand’s import content — particularly from China — has risen significantly compared with the past. This will constrain the benefits to domestic production while increasing the risk of U.S. transshipment tariffs. At the same time, Thai businesses continue to face declining profitability and rising debt burdens, posing key constraints to overall investment momentum.

4. Will tight financial conditions improve?

In 2025, even though the Monetary Policy Committee cut the policy rate, financial conditions tightened significantly as household and SME lending contracted and the baht appreciated sharply. For 2026, EIC expects the policy rate to be lowered to 1.0% to support Thailand’s subdued growth outlook by reducing financing costs, easing pressure on the baht, and lifting headline inflation—which is likely to remain below target—thereby reducing the risk of debt deflation that could weigh on domestic spending. However, rate cuts alone may not significantly improve credit access for households and SMEs, as their financial positions remain fragile amid heightened economic uncertainty, prompting banks to stay cautious in lending. SCB EIC recent surveys show that insufficient income relative to expenses is a key reason why debt-servicing burdens remain high, especially among low- to middle-income households, with signs that the problem is spreading to higher-income groups. Government measures will therefore be critical, including household debt restructuring, soft loans, and credit guarantees for SMEs. The success of these financial measures, however, must go hand-in-hand with policies to boost household income and enhance SME competitiveness

5. How will political uncertainty affect fiscal policy and the economy?

Political uncertainty following the dissolution of parliament on December 12 has affected fiscal policy implementation. Investment budget disbursement for FY2026 is expected to be lower than normal level, while preparation of the FY2027 Budget Act is likely to face some delays, resulting in slower investment spending early in FY2027. Although the immediate impact may not be severe, uncertainty remains high. In addition, medium-term government spending will face tighter fiscal constraints due to efforts to implement fiscal reforms aimed at reducing budget deficit and controlling public debt ratio. These will be key tasks for the new government to maintain Thailand’s confidence from credit rating agencies and ensure long-term fiscal stability.

6. Structural reform is the way forward, but how sustainable will it be?

The Thai economy stands at a critical turning point, facing mounting pressures on multiple fronts — from external factors such as the trade war and potential risks to the country’s credit rating, to long-standing domestic vulnerabilities. Structural reform has therefore become an unavoidable path forward. Thailand must continue and accelerate the implementation of comprehensive economic reforms.  With a focus on long-term policies to enhance the country’s competitiveness, the strategy emphasizes upgrading business support measures and restructuring the economy in partnership with the private sector, for example, removing investment barriers and promoting high-potential industries through a reform platform in collaboration with businesses socalled ‘Reinvent Thailand’.

7. Which businesses can move forward, and how can they adapt to survive?

In 2026, Thai businesses will be driven by five key challenges:

(1) global supply chain volatility,

(2) fragile household purchasing power,

(3) policy uncertainty,

(4) intensifying domestic and international competition, and

(5) mounting pressures from rapidly evolving megatrends.

Overall, downside risks outweigh the positives, suggesting that business activity will remain subdued in 2026. Sectors facing pronounced slowdown and heightened risks include manufacturing — particularly electronics, automotive, petrochemical, and steel — as well as the real estate sector, which is expected to remain weak. Meanwhile, service sectors such as tourism and retail trade should continue to expand, albeit amid elevated uncertainties that businesses will need to navigate carefully.

However, certain business segments — even those facing slowdown risks — still have opportunities to grow if they can adapt effectively and leverage emerging megatrends. Firms that integrate new innovations, align with evolving consumer and sustainability trends, or diversify into new and high-potential markets will be better positioned to capture growth opportunities.

Nonetheless, successful adaptation will also require proactive government support through both short- and long-term measures. In the short term, policies should focus on stimulating demand, restoring confidence, and enhancing liquidity. Over the longer term, structural measures will be essential to remove investment barriers, strengthen existing industries, and foster the sustainable growth of high-potential sectors.

 

The global economy is expected to slow next year as the impact of U.S. tariff becomes more pronounced.

The global economy is projected to slow to 2.5%YOY in 2026, down from 2.7%YOY in 2025, as the full-year impact of U.S. tariff barriers weighs on global trade following the dissipation of front-loading effects. Although exports of AI-related electronic products are expected to remain robust, global growth will increasingly rely on AI-driven investment, particularly in the U.S., where both private investment and wealth creation through asset prices in AI-related sectors will serve as key growth engines.

Investment in technology and data centres will also benefit emerging economies that are part of the global technology supply chain. Meanwhile, global monetary and fiscal policies will remain accommodative, but constraints are becoming more evident. Some economies are reaching the end of their rate-cutting cycles, while others continue to face inflationary pressures. On the fiscal front, higher borrowing costs and elevated public debt levels are limiting the room for further policy support to sustain economic growth going forward.

Global monetary policy in 2026 is expected to remain accommodative overall (except in Japan). However, the scope for further rate cuts is increasingly limited, as most central banks have already lowered policy rates substantially this year and are approaching the end of their easing cycles. SCB EIC expects the U.S. Federal Reserve (Fed) to gradually cut its policy rate by another 50 bps before maintaining rates at levels higher than those seen prior to the COVID-19 pandemic due to persistent inflation risks. The European Central Bank (ECB) is projected to keep its policy rate at 2% throughout 2026, while the Bank of Japan (BOJ) is expected to continue raising rates gradually to 1.25% by next year, supported by clearer evidence of sustained annual wage increases.

Key global economic risks in 2026 include: (1) Trade policy uncertainty, particularly regarding U.S. import tariff measures under consideration — both product-specific tariffs such as on electronics and potential transshipment tariffs; (2) Geopolitical tensions, stemming from the U.S. scaling back its support for NATO and Europe, as well as rising diplomatic frictions between Japan and China; (3) Global financial market risks, especially the possibility of a significant correction in AI-related asset prices following their rapid surge; and (4) Climate-related impacts, as extreme weather events and natural disasters are expected to intensify worldwide.

Key highlights

• SCB EIC forecasts Thailand’s GDP to grow 1.8% in 2025 before slowing to 1.5% in 2026. H2/25 average growth is likely below 1%, raising technical recession risk.
  
  
• Key growth drivers are losing  momentum. Both external and domestic challenges are intensifying amid tighter fiscal constraints.
  
  
• Thai economy will becomes increasingly difficulty in relying  on global demand.

- Trade tensions: The 19% U.S. tariff begins to weigh on Thai exports, with several product categories already contracting and likely to continue declining.

- Thai baht appreciation: ahead of regional peers and strongest since the 1997 crisis. The bath misalignment with economic fundamentals is placing additional pressure on exports and tourism.

- Foreign tourist arrivals well below last year with cautious spending: Signs of bottoming out are emerging, but strong baht could weaken competitiveness.

• Thailand’s domestic economybecomes increasingly fragile.
  
  - Fragile SMEs: SMEs revenues still fall below pre-COVID levels and profitability subdued. Zombie firms continue to rise.
  
  - Labor market under pressure: Unemployment rose in some segments with reduced working hours, and declining income.
  
  - Fiscal constraints: Public debt is approaching its 70% ceiling in coming years. Thailand also faces rising risk of  a sovereign credit rating downgrade.
  
  
• SCB EIC expects the MPC to cut rate to 1.25% later this year, followed by another cut to 1%  in early 2026. This aims to ease financial conditions, debt burdens, and credit risks.
  
  
• The new government should focus on three key economic policies (3S):
  
  - Stabilize – Restore confidence through clear, actionable goals, proactive communication, and effective implementation.
  
  - Stimulate – Boost the economy with targeted, swift, and temporary fiscal measures, alongside monetary easing via policy rate cuts, credit guarantees, and exchange rate management.
  
  - Structural Reform – Enhance government support for businesses by removing regulatory barriers, expanding market access, promoting green investment, and laying the foundation for economic transformation through future-oriented industrial policy, workforce skill development, and fiscal reform.
  
  
• SCB EIC forecasts global economy to slow to 2.5% in 2025 and 2.4% in 2026, pressured by trade and investment headwinds linked to Trump policies. Over the medium term, global investment is expected to gain momentum, driven by the shift towards digital economies. This will likely attract foreign direct investment (FDI) into strategic industries, supported by acceleration of existing trends such as friendshoring, reshoring, and nearshoring.
  
  
• Thailand must step up efforts to strategically attract FDI amid global shifts.
  
  - Thailand’s FDI outlook remains promising, especially in emerging sectors like data centres and fugure food. Traditional target industries such as electronics and automotive still show growth potential but face rising pressures from global trade uncertainty and investment relocation towards USMCA, Japan, and the EU, which benefit from more favourable U.S. trade agreements.
  
  - Thai businesses must enhance production standards, upskill workers, and better integrate  into global supply chains. The government must accelerate regulatory reforms, streamline procedural barriers, and build an investment-friendly ecosystem.

• Export slowdown: Thai exports recorded solid growth during the first eight months of 2025, driven by front-loading ahead of higher U.S. import tariffs and a surge in earlyyear gold exports. However, growth slowed in August as the 19% U.S. tariff took effect. Export gains to the U.S. are now concentrated in electronics, which remain tariff-exempt, while  other categories haveturned negative. SCB EIC forecasts a decline in Thai exports for the rest of 2025 and into 2026, as front-loading fades and exporters face more complex U.S. tariff barriers amid weakening global demand.

• Baht appreciation adds further pressure to the economy: The Thai baht has appreciated over 8% against the US dollar this year—its strongest level in four years and the highest among regional peers. This has led to the baht’s trade-weighted index reaching its strongest point since the 1997 crisis. The appreciation is driven by both external factors, especially the weakening US dollar, and domestic factors, including a surge in gold exports due to rising gold prices, a current account surplus, and capital inflows into the bond market. The baht’s strength is misaligned with Thailand’s subdued economic fundamentals. The baht may act as a shock amplifier of external shocks, hurting export competitiveness and  tourism recovery. Sectors most exposed those with high export dependence and domestic input sourcing (e.g. agricultural), as well as those service businesses highly reliant on foreign income (e.g. tourism). These sectors could face foreign exchange losses when converting US dollar revenues into baht terms to pay for local inputs and wages due to baht appreciation.
  
  
• Foreign tourist arrivals remain well below last year, but signs of bottoming out are emerging: Chinese visitors are still down year-on-year, though the decline is narrowing. Most tourists are returning with more cautious spending behavior. Thailand faces growing competition for Asian tourists, with overlapping target segments across regional peers. The bath continued appreciation poses a risk to Thailand’s price competitiveness, especially against destinations like Vietnam and China with weaker currencies. Efforts to attract tourists from India, the U.S., and China may be further challenged, suggesting a fragile recovery ahead.

• Business revenues remain subdued with low profitability: The business sector, particularly SMEs, remains fragile. Revenue recovery is increasingly K-shaped.  SMEs lag behind with average revenues still below pre-COVID levels. Income concentration among large firms continues to rise, with the top 1% now accounting for over 76% of total business income—highlighting growing challenges for SMEs. Meanwhile, the share of “zombie firms” (those unable to cover interest payments for three consecutive years) rose notably in 2024, particularly among SMEs. Listed companies have seen revenuerebound strongly post-COVID, but profitability declines and uneven across sectors. Industrial firms still face cost pressures and have yet to restore profit margins back to pre-pandemic level. As a result, private investment is expected to grow only modestly in 2025-2026. While imports of machinery and capital goods are likely to continue, mostly from foreign investment in electronics, EV, and data centers. While the short-term economic impact may be limited due to high import content, these investments lay the foundation for the country’s future New S-Curve industries.
  
  
• Labour market becomes weaker, with declining household income: Since early 2025, Thailand’s labour market has deteriorated, with rising unemployment among social security registrants and new graduates. Working hours have declined across  sectors, while underemployment has increased, putting pressure on income recovery. Trade war risks are compounding these vulnerabilitiesin both direct and indirect ways. Employment in high- to medium-risk sectors has contracted, aligning National Statistical Office data showing a drop in average household income in H1/2025.
  
  
• Fiscal constraints remain a concern: In the short term, fiscal stimulus may provide limited support to private consumption due tothe relatively small budget envelope. Political uncertainty—particularly if Parliament dissolves ahead of 2026 elections6—could delay FY2027 budget drafting process and slow disbursement. Public debt is approaching the 70% ceiling in coming years. The government faces challenges to narrow fiscal deficit. Interest expenditures are rising, while ageing-related welfare expenditures remain hard to reduce. In addition, revenue collection continues to underperform. These mounting pressures pose medium-term fiscal sustainability risk and raise the risk  of a sovereign credit rating downgrade. To mitigate this, a clear framework, concrete measures, and transparent communication of a fiscal reform plan are urgently needed.

The global economy is expected to slow through next year, weighed down by the impacts of trade wars and elevated policy uncertainty.

SCB EIC projects that global economic growth will slow to 2.3% in 2025 and 2026, down from 2.8% in the previous year, primarily due to intensifying trade tensions and elevated economic uncertainty. The U.S. tariff hikes represent a supply-side shock that will weigh on the U.S. economy, leading to slower growth and accelerating inflation. In contrast, most other countries will face demand-side pressures, including weakening exports and easing inflation. Furthermore, heightened uncertainty surrounding U.S. trade policy and increased financial market volatility are undermining business and household confidence, resulting in postponed or reduced investment and consumption activities.

The impact on international trade and investment is expected to intensify and become more pronounced from the second half of 2025 onward, following front-loaded production and exports by several countries ahead of the imposition of U.S. import tariffs. SCB EIC anticipates that trade agreement negotiations between the U.S. and its trading partners may be prolonged and fail to conclude within the expected timeframe.
In addition, ongoing legal processes within the U.S. concerning the president’s authority to implement tariff policies will further contribute to elevated trade policy uncertainty during the second half of the year.

Moreover, the global economy continues to face heightened financial market volatility stemming from declining confidence in U.S. dollar-denominated assets and rising geopolitical risks. Confidence in the U.S. dollar and U.S. assets has weakened due to multiple factors, including policy uncertainty, a sharp increase in U.S. public debt leading to sovereign credit rating downgrades, and perceived attempts to interfere with the independence of the Federal Reserve. These developments have contributed to a depreciation of the U.S. dollar, while long-term U.S. Treasury yields have risen significantly—posing risks to the sustainability of U.S. fiscal policy going forward.

At the same time, heightened geopolitical risks—particularly the outbreak of conflict between Israel and Iran—pose additional threats to the global economy. Although the immediate impact on oil prices may be limited due to ample excess supply, any escalation of the conflict that disrupts key supply sources in the Middle East would significantly increase global vulnerability and represent a major downside risk to the economic outlook.

Most major central banks are expected to adopt more accommodative monetary policies to support economic recovery, albeit at differing paces depending primarily on inflation trends. SCB EIC anticipates that the U.S. Federal Reserve (Fed) will initiate its first rate cut of 25 basis points toward the end of this year, followed by only two additional cuts of the same magnitude in 2026, due to persistent inflation risks stemming from tariff barriers and expansionary fiscal policies. Meanwhile, the People’s Bank of China (PBOC) is expected to further lower its policy rate to 1%. As for the European Central Bank (ECB), its rate-cutting cycle is nearing completion, having already reduced rates by 100 basis points this year, with the likelihood of one additional 25-basis-point cut later this year amid easing inflationary pressures.

Thailand’s economic growth is projected to remain below 2% through next year, weighed down by the global trade slowdown and persistent structural scars within the economy.

SCB EIC maintains its view that the Thai economy will grow at a subdued rate of 1.5% this year, with growth expected to slow further to 1.4% in 2026. This outlook reflects the effects of ongoing trade tensions, structural scars in the household and SME sectors, and growing constraints on fiscal policy. In the second half of this year, economic growth is projected to average below 1%, with a risk of entering a technical recession due to weakening exports and investment. Meanwhile, tourism is expected to provide less support than previously anticipated. The forecast for foreign tourist arrivals this year has been revised downward to 34.2 million, marking a contraction from the previous year, in line with the declining trend in Chinese visitors and more cautious spending behavior among tourists amid the global economic slowdown.

Private investment is likely to continue contracting, pressured by heightened trade policy uncertainty, weakening domestic and external purchasing power, and declining business confidence. These factors are prompting firms to delay investment decisions, despite the continued increase in investment promotion approvals by the Board of Investment (BOI).

Looking ahead, Thailand’s key economic drivers are expected to lose momentum across nearly all dimensions, particularly private consumption, which is projected to decelerate significantly. A major contributing factor is the ongoing deleveraging process, as households continue to adjust from previously elevated debt levels—prompting more cautious spending behavior. In addition, consumption will face further headwinds from labor market and income vulnerabilities, sharply declining consumer confidence, and persistently tight financial conditions.

The government’s revised economic stimulus plan, with a budget of THB 157 billion as a replacement for the digital wallet scheme, may offer more targeted support to the economy. However, its positive impact is expected to materialize more slowly and remain insufficient. SCB EIC estimates that the fiscal impulse from government spending will weaken in 2026, while public debt is projected to approach the 70% of GDP ceiling within the next one to two years. This trend could constrain the government’s ability to implement further stimulus measures in the future, unless accompanied by fiscal reform.

Headline inflation remains in negative territory, reflecting continued declines in energy prices and subdued domestic purchasing power. Inflation is expected to remain negative in Q2 before gradually rising toward the end of the year. However, inflation is likely to stay below the target range through 2026, due to sluggish demand recovery and low growth in energy and agricultural prices. Geopolitical risks, particularly the ongoing conflict in the Middle East, remain a key factor to watch.

Further policy rate cuts remain warranted to help ease persistently tight financial conditions.

SCB EIC expects that the Monetary Policy Committee (MPC) may cut the policy rate two more times this year, bringing it down to 1.25%, in order to ease tightening financial conditions amid an economy growing well below its potential. Inflation has fallen below the lower bound of the monetary policy target, and credit quality continues to deteriorate. Financial conditions have remained persistently tight, as reflected by
a real policy rate that remains above historical averages, continued contraction in credit, and a notable appreciation of the Thai baht against major trading partners’ currencies—approaching levels last seen in 1997.

 
Although the effectiveness of interest rate cuts may be limited under current conditions—given the structural challenges and elevated uncertainty facing the economy—they can still play a supportive role in stabilizing economic activity, alleviating debt burdens for borrowers, and facilitating the deleveraging process among households and businesses. Concerns about excessive household borrowing following significant rate reductions are likely to be mitigated by financial institutions’ cautious lending practices. Moreover, authorities retain the option to implement additional macroprudential measures should debt accumulation reach unsustainable levels.

 

Thai businesses are facing multiple challenges on several fronts, yet opportunities still remain.

Thailand’s business sector continues to show signs of deceleration and faces rising uncertainty, driven by multiple risks that could adversely affect operations. Key concerns include uncertainty surrounding U.S. trade policy and the outcomes of trade negotiations, as well as the escalation of the Israel-Iran conflict, which could place renewed upward pressure on energy prices. In addition, the influx of Chinese imports is expected to intensify, posing challenges for both export-oriented industries and those focused on domestic consumption.

The disconnect between export growth and domestic export-oriented manufacturing activity may reflect the increasing influence of businesses with high import content and transshipment operations—firms that route goods through Thailand for re-export to third countries by claiming Thai origin, without actual domestic production. These business models have gained a more prominent role within the Thai economy and constitute a key factor constraining the recovery of Thailand’s manufacturing sector, particularly in industries such as electronics components and automotive. Similarly, sectors reliant on domestic purchasing power continue to face headwinds from persistent household vulnerabilities, weighing down the recovery prospects of core industries such as automotive and residential real estate. Furthermore, the tourism sector and related industries have also become a drag on overall business recovery.

Nevertheless, amid rising risks and uncertainty, certain subsegments of Thai businesses still hold growth potential by adapting and developing products and services that cater to high-potential consumer groups. These include businesses targeting emerging tourist segments, those offering uniquely differentiated products and services, and sectors aligned with global megatrends—such as health and wellness and sustainability—which continue to present strong growth opportunities even in times of crisis.

The return of President Trump for a second term has heightened global uncertainty. The policies under Trump 2.0 are set to reshape the global order, particularly in trade, investment, and international relations. These shifts will put pressure on the global economy and impact business decision-making worldwide. Looking ahead, SCB EIC assesses that the U.S. will adopt an unpredictable policy approach, adjusting its stance based on negotiations. In our baseline, the U.S. is expected to implement reciprocal tariffs instead of the universal tariffs previously proposed during the campaign. Additionally, the U.S. may introduce specific tariffs targeting certain products or countries, such as automobiles, steel, and aluminum, or imports goods from China and Canada. SCB EIC estimates that, under the baseline scenario, the U.S. import tariff hikes will raise the country's effective tariff rate by approximately 11% from its previous level. If U.S. trading partners retaliate with counter-tariffs, a new wave of trade wars could cumulatively reduce global GDP by –1.3% and push global inflation up by 0.5% over the medium term. While the net economic impact on the U.S. may be less severe compared to the global economy, U.S. inflation is expected to accelerate further due to its tariff policy.

SCB EIC projects a sligt slowdown in  global economic growth to 2.6% this year, down from 2.7% last  year, driven by the escalating trade war. However, countries are ramping up economic stimulus measures to mitigate external shocks. In response, Eurozone and China are adopting more expansionary fiscal policies. Germany plans to relax its debt brake rule to increase defense spending and has proposed a EUR 500 billion infrastructure fund for public investment over the next decade. Meanwhile, China is set to run
a record-high fiscal deficit of 4% of GDP, allowing local governments to take on more debt, and planning to borrow RMB 500 billion to recapitalize state-owned banks.

Monetary policies among major economies will diverge and  high uncertain this year. The U.S. Federal Reserve (Fed) is expected to cut interest rates by 50 bps as previously projected, despite persistent inflation risks that could be exacerbated by its own tariff policies. However, signs of an economic slowdown in the U.S., driven by the impact of Trump 2.0 policies and heightened policy uncertainty, support the case for rate cuts. Meanwhile, the European Central Bank (ECB) is likely to reduce rates more aggressively than the Fed. A total cut of 100 bps is expected this year, as Europe’s economy remains weaker while inflation is relatively lower. In contrast, the Bank of Japan (BOJ) is expected to continue raising rates by 50 bps this year to support the yen’s depreciation and ensure inflation remains sustainably above its target.

SCB EIC maintains  Thailand’s economic growth forecast at 2.4% for this year, supported by tourism recovery, additional stimulus measures—particularly the remaining phase of the 10,000-baht digital wallet scheme—and continued public investment expansion driven by accelerated budget disbursement. However, the effectiveness of consumer stimulus will depend on how efficiently the funds are utilized. At the same time, U.S. trade protectionist policies are expected to pressure Thai exports and private investment, making Thailand highly vulnerable to the trade war through both direct and indirectchannels. In recent years, Thai exports have become increasingly reliant on the U.S. market. Meanwhile, imports from China have risen. China has been gradually shifting away from its dependence on the U.S. and diversifying its trade with other markets.

Amid rising external pressures, Thailand’s manufacturing sector is expected to recover slowly this year. A key factor is the surge in imports from China, particularly capital goods and raw materials. At the same time, Chinese investment trends in Thailand are shifting—moving away from export-oriented production for the U.S. market toward domestic market competition instead. While private investment is set to rebound this year after a sharp contraction last year, much of this recovery is driven by capital goods imports linked to foreign direct investment (FDI). Meanwhile, domestic investment in other sectors remains weak.

SCB EIC notes that Thailand’s economic recovery remains sluggish, ranking among the slowest globally. This reflects multiple economic scars from COVID-19, which have exacerbated existing structural weaknesses:

1. Scars in business sector: The business income recovery has been K-shaped, with large firms rebounding while many smaller businesses continue to struggle. The share of zombie firms—companies barely surviving—remains higher than pre-pandemic levels, particularly among small enterprises.

2. Scars in Labor market: Despite steady improvement in labor market, labor mobility has deteriorated. The share of informal workers has continued to rise, yet their income remains nearly half that of formal workers.

3. Scars in household sector: Household debt remains highl close to 90% of GDP, despite a slight decline. The main driver is a contraction in new loans, which limits private consumption. While the remaining phase of the 10,000-baht cash handout will provide temporary support, slow income recovery, high debt burdens, and tighter credit access will continue to weigh on consumption.

4. Scars in fiscal sector: Public debt has risen sharply compared to pre-COVID levels and is expected to approach the 70% debt ceiling within the next few years. Although the government will run a high fiscal deficit in FY2025, the medium-term fiscal outlook will become increasingly constrained by structural weaknesses in the country’s fundamental.

With these enduring economic scars, Thailand's recovery will remain K-shaped, and long-term growth prospects are likely to stay low.

SCB EIC projects that the Monetary Policy Committee (MPC) may cut interest rates two more times this year, bringing the policy rate to 1.5% by year-end. This is due to two key factors: 1) Financial conditions will remain tight, especially for high-risk borrowers. Financial institutions remain cautious in extending lending to retail borrowers, while the cost of issuing bonds for businesses with lower ratings is increasing.
The baht has appreciated rapidly compared to the regional currencies, adding pressure on exports. 2) Thailand’s economy is expected to face further headwinds from U.S. protectionist measures. Additional monetary easing would help support the economy amid such external and domestic challenges.

1. Tight financial conditions persist:

·  Financial institutions remain cautious in extending retail credit, particularly to high-risk borrowers.

·  Businesses with lower credit ratings face rising funding costs in the corporate bond market.

·  The Thai baht has appreciated rapidly compared to regional currencies, adding pressure on exports.

2. Additional economic impact from U.S. trade policies:

· Thailand’s economy is expected to face further headwinds from U.S. protectionist measures.

· A more accommodative monetary policy would help support economic growth amid both external and domestic challenges.
 

Looking ahead, SCB EIC emphasizes that Thailand must urgently 'strengthen from within', by balancing both short-term and long-term strategies. Effective public communication is also crucial to build confidence in the government’s budget resource allocation for the country’s economic transformation. This requires action through short-term policies to mitigate the impact of external uncertainties and adjust macroeconomic frameworks to support structural economic transformation. Long-term policies should focus on enhancing country’s competitiveness in various dimensions and uplifting government efficiency

The impact on Thai businesses is expected to intensify, particularly due to the U.S. Reciprocal Tariffs and Specific Tariffs, which will likely affect export-oriented industries such as electronics, automotive and parts, and petrochemicals. Additionally, there is a need to monitor indirect effects through key trading partners, such as China, in industries heavily integrated into supply chains that export to the U.S. market. The slowdown in major trading partners’ economies also poses further risks. Moreover, an influx of Chinese goods into Thailand may become more severe, along with a potential increase in U.S. imports into Thailand following trade negotiations. These factors could further pressure domestic production in certain industries. However, there may be positive opportunities for some Thai businesses to capture U.S. market share previously held by China or Mexico.

In this context, SCB EIC suggests that Thai businesses can use the 4P strategy to adapt and cope with the pressures from Trump 2.0 policies and the issues of structural weaknesses in production side:

1. Product – Develop products that meet market demands, differentiate offerings, and add value.

2. Place – Diversify markets to reduce dependency on any particular market.

3. Preparedness – Manage risks comprehensively, including supply chain disruptions and financial statements.

4. Productivity – Increase productivity to strengthen firm competitiveness and ensure sustainable long-term business growth.

SCB EIC Downgrades Global Economic Forecast for 2025 Amid Geopolitical Tensions and Intensified Trade Protectionism from Trump 2.0

SCB EIC has revised its 2025 global economic growth forecast from 2.8% to 2.5%, citing the anticipated impacts of Trump 2.0 policies. These policies are expected to exacerbate geopolitical tensions and intensify trade protectionism, adversely affecting global economy primarily through trade, investment, and labor markets. While several major economies have prepared some measures to mitigate the negative impacts from Trump 2.0. However, political conflicts in some countries, including Germany, France, and South Korea, could pose significant risks for efficient policy responses. The U.S. economy will experience moderate net negative impacts from the Trump 2.0 policies. This is because some certain policies, such as income tax cuts and deregulation, would help stimulate domestic investment.

Uncertain and Diverging Monetary Policy Directions

The global monetary easing is becoimg more divergent and uncertain. SCB EIC expects the U.S. Federal Reserve (Fed) to adopt a more cautious approach to ease policy rate due to heightened inflation risks stemming from Trump 2.0 policies, particularly tariff hikes and incentives for domestic investment.

Despite this new factor, global inflation may not rise significantly. This is partly attributed to a slowing global economy and declining energy prices, driven by weaker global demand and increased oil supply from the U.S. supported by Trump. These conditions are likely to lead European Central Bank (ECB) and The People's Bank of China (PBOC) to implement further rate cuts to address structural challenges and additional pressures from Trump 2.0 policies. Meanwhile, Japan may take a different path, potentially normalizing rates faster than anticipated to counter excessive yen depreciation triggered by Trump 2.0.

Thai Economy Will Expand Notably in Q4 but Will Face Pressures from Trump 2.0 Since H2/2025

The Thai economy in Q4 is expected to grow by 4%, driven by continued momentum from export, government spending, and the tourism sector. SCB EIC projects the Thai economy to expand by 2.7% in 2024. However, the economy is likely to feel the impact of Trump 2.0’s trade protectionist measures since H2/2025.

Thailand is more likely to face a significant risks of being subjected to U.S. import tariffs, as more than 70% of total exports to U.S. fall into product categories targeted by the U.S. for reducing trade deficits and promoting local supply chains. These categories include electronics, automobiles and parts, machinery, and computers.

Moreover, China’s overcapacity issues will put additional pressure on the competitiveness of Thai products both domestically and internationally, leading to an export slowdown. This will further exacerbate the challenges facing Thailand’s manufacturing sector, which has yet to recover, even with the anticipated additional fiscal stimulus next year.

Private Investment Set to Recover Modestly in 2025 Amid Industrial Challenges

Private investment is projected to recover in 2024, though the rebound is expected to remain modest due to ongoing challenges in the industrial sector, including competition from Chinese imports and weak domestic demand. Additionally, according to SCB EIC Consumer Survey 2024, it reveals that over 60% of consumers expect Thailand's economic outlook to get worse next year, with low-income groups showing the highest levels of pessimism.

This reflect fragile consumer confidence, with many likely to cut back on spending amid economic and income uncertainties. The survey also points to declining demand for new housing and vehicles in the coming year, driven by factors such as difficulties in accessing credit, high prices, limited income, and debt repayment obligations.

SCB EIC Projects Deterioration in Overall Retail Loan Quality Amid Tightened Lending Standards

SCB EIC anticipates that the overall quality of retail loans is likely to deteriorate further, amid continued strict lending standards by financial institutions. Data from the National Credit Bureau (NCB) indicates a persistent decline in retail loan quality, suggesting that household debt issues will take time to resolve. This is expected to weigh on consumption in the near term.

The latest household debt resolution measures aim to provide greater support to vulnerable retail borrowers who still have the potential to repay their debts. However, the success of these measures will largely depend on the recovery of borrowers' incomes.

SCB EIC Expects a 0.25% Policy Rate Cut by MPC in February 2025 and Remain at 2% Throughout the Year

SCB EIC forecasts that the Monetary Policy Committee (MPC) will lower the policy rate by 0.25% in February 2025 to 2% and maintain at this level for the rest of the year. Althought there is no immediate pressure to prompt a rate cut, increasing downside risks to the Thai economy from both internal vulnerabilities and external challenges are anticipated. Additionally, a further rate reduction would help ease debt burdens and mitigate the impact of tighter financial conditions on overall economic activity.

Baht to Weaken Slightly in the Short Term but Strengthen in H2/2025

The Thai baht is expected to depreciate slightly, remaining within a range of 34.00–35.00 baht/USD for the rest of this year. However, a close attention must be paid to fluctuations in other currencies that could impact the baht.

In 2025, capital outflows are likely to continue, exerting downward pressure on the baht in the first half of the year. However, the baht may strengthen in H2/2025, supported by several factors, including the Federal Reserve’s rate cuts, declining global oil prices, rising gold prices, and returning capital inflows. By the end of 2025, the baht is projected to range between 33.50–34.50 baht.USD.

Thai businesses still face significant risks, driven by global economic volatility, Trump 2.0 policies, intense competition from abroad, pressures from mega trends, and structural challenges within Thailand's own manufacturing sector. The extent of the impact, however, will depend on each business’s ability to adapt. For instance, the automotive industry is affected by global economic volatility and household vulnerabilities, compounded by the pressure from transition to EVs, which limit businesses’ ability to adapt. In comparison, although the residential real estate sector is affected by slowing purchasing power, some businesses have successfully pivoted to target high-potential customer segments.

These external challenges and internal weaknesses reflect Thailand's slowing economic growth in the short-term and long-term structural issues. Additionally, Thailand's economic development direction in recent years has provided few opportunities for upward mobility within the social structure. These constraints have led to a Thai economy that exists in 'Two worlds,' differing across the following three dimensions:

1. Dimension: Weak vs. Strong. The two worlds of households with weak financial position versus those with strong financial position highlight the severe wealth inequality among Thai households. Households with weak financial position often face income shortfalls relative to expenses and have irregular earnings. When such households encounter income shocks, their world is more significantly affected, and their recovery is slower compared to households with strong financial position.

2. Dimension: Old vs. New. The two worlds of the old manufacturing sector versus the new manufacturing sector. The old manufacturing world is not evolving alongside changes in the economic, social, and technological landscape or will face various risks. In contrast, the new manufacturing world have opportunities to grow with the changing landscape and are less impacted by risks.

3. Dimension: Large vs. Small The two worlds of large businesses versus small businesses reveal stark differences in resilience and growth. Small businesses experience significantly more profit volatility than large businesses. During the COVID-19 crisis, the revenue of large businesses did not decline and even grew by nearly 10% after the crisis ended. Conversely, the revenue of small businesses contracted by approximately 2-3% during COVID-19 and has yet recovered.

The future direction for Thailand’s economic development should focus on bridging the gap between these two worlds through three goals for quality economic growth as follow:

1. Thai people should have buffers against adverse events, which would provide a solid ground for those in the lower-income world to seize growth opportunities. This is done through building resilience for low-income individuals. Policymakers should play a critical role in this process by designing supportive mechanisms, such as targeted social assistance and social security programs, alongside financial regulations that foster the development of insurance markets for low-income individuals and small businesses.

2. Thai people should grow by developing and adapting themselves to the changing economic, social, and technological landscape. In support of the process, policymakers should act as facilitators by securing business opportunities for domestic businsses through trade and investment negotiations.

3. Thai people should have the opportunities to generate economic value and grow inclusively. Policymakers have roles as designers of frameworks for economic resource allocation and fair competition to ensure that individuals from the lower-income world have access to resources, enabling them to compete effectively and grow inclusively.

The global economy is expected to slow in the latter half of this year following robust growth in the first half. Overall, global growth for 2024 is projected at 2.7%, with a slight uptick to 2.8% in 2025, indicating a soft landing. However, concerns over a potential hard landing, particularly in the U.S., are resurfacing due to rapidly rising unemployment rate, triggering recession warning indicators. Nevertheless, SCB EIC assesses that a soft landing remains more likely due to the strong momentum from major economies during the first half of the year and leading indicators suggesting continued growth in the near future. Additionally, the rapid rise in unemployment in the U.S> is partly due to a growing labor supply and not just solely a decline in hiring demand.

A key supportive factor for the global economy is the gradual reduction of interest rates by major central banks, as economic growth and inflation slow down. This trend will help cushion the economy and reduce the likelihood of a recession. By the end of 2024 and into 2025, the Federal Reserve (Fed) is expected to lower its policy rate by a total of 200 basis points (bps), while the European Central Bank (ECB) is likely to reduce its rate by 150 bps after a 25-bps cut in June. These lower inflation rates and interest rate reductions are expected to boost both domestic and international consumption.

However, international political tensions will likely slow global economic growth and increase vulnerability in the medium term. Lingering geopolitical conflicts will lead to adjustments in global supply chains and trade, accompanied by a rise in protectionist measures. These factors will hinder inflation and policy rates in most major economies from reverting to historically low averages. Post-election U.S. foreign policy will play a significant role in shaping the future dynamics of global trade. A Trump victory could hasten economic decoupling and global supply chain reconfiguration.

SCB EIC projects that Thailand’s economy will expand by a modest 2.5% and 2.6% in 2024 and 2025, respectively. Tourism will remain the primary driver for the Thai economy. SCB EIC forecasts 39.4 million foreign visitors in 2025, although this growth will be constrained by the slow return of Chinese group tours. In contrast, Thailand's export growth in 2025 will remain weaker than in the past, partly due to declining competitiveness. While industrial production is gradually recovering in line with improved exports, it continues to face headwinds from high inventories and weak domestic demand. Private investment is projected to contract slightly this year but should resume modest growth next year, supported by a significant increase in Board of Investment (BOI)’s certificate approvals. However, overall private investment will remain subdued due to slow growth in construction and delayed recovery in transporation investment, constrained by tight credit conditions. Private consumption will also slow, particularly in durable goods , especially automobiles, where sales continue to decline. Agricultural incomes are expected to contract due to declining prices of key commodities next year, further pressured by weakening consumer credit due to deteriorating credit quality, reflecting low consumer confidence, as seen in the SCB EIC Consumer survey 2024. This suggests an increasing tendency for consumers to cut back on non-essential goods and services spending. Government efforts to stimulate the economy will face greater fiscal constraints. SCB EIC estimates that while the digital wallet scheme involves substantial budget, its economic impact will be temporary and somewhat limited, potentially leading Thailand’s public debt ratio to reach the ceiling by 2027.

Most of the new government's immediate economic policies reflect a continuation of the previous administration’s policies, albeit with an increased emphasis on supporting vulnerable households and businesses. SCB EIC assesses that short-term stimulus measures will benefit businesses related to consumption, tourism, and agriculture. Meanwhile, industries that rely heavily on low-wage workers are likely to experience increased cost pressures, and the energy industry might witness a drop in revenue. On the other hand, competitiveness-boosting policies will favor infrastructure-related businesses, industries aligned with global trends, and future industries. Environmental policies will pose both challenges and opportunities, requiring numerous businesses to adapt.

Structural challenges continue to weigh on the Thai economy. Specifically, 1) the automotive industry could lose around 40% of domestic production capacity if manufacturers fail to adapt to shifting market preferences, and 2) SMEs will face increasing pressure from weak domestic demand, compounded by competition from imports and outdated production and marketing practices. To ensure sustainable growth, these sectors will require short-term stimulus combined with long-term policies to enhance competitiveness.  

SCB EIC anticipates the Monetary Policy Committee (MPC) to cut the policy rate in December, followed by an additional reduction early next year, lowering it to 2% as domestic demand softens. This is partly influenced by prolonged tightness in financial conditions. The Thai baht has appreciated recently, driven by a weaker U.S. dollar, higher gold prices, and easing concerns over Thai political stability. In the short term,
the baht may weaken slightly due to U.S. economic factors but will return to an appreciation trend as the Fed's rate cuts cycle take place.  By the end of 2024 and 2025, the baht is projected to move within the ranges of 34-34.5 and 33-34 baht per USD, respectively.

The global economy in 2024 and 2025.

The global economy in 2024 and 2025 is expected to grow steadily at 2.7%, albeit remaining below the pre-COVID-19 pace. The US economic outlook for 2024 has significantly improved thanks to robust domestic demand. In Asia, China’s economy exhibits promising prospects from the manufacturing sector and economic stimulus measures, while India and ASEAN economies will continue their growth trajectory. On the other hand, the Eurozone and Japan are likely to experience subdued growth. In 2025, we expect a shift in global economic drivers. ASEAN economies will continue acceleration. India will maintain buoyant growth despite a slight slowdown. The Eurozone and Japan will improve with modest rebound. In contrast, the US economy will experience slower growth, while structural issues in China will hamper growth. The global economy is expected to decelerate in the medium term due to emerging challenges, particularly China’s structural problems and escalating geopolitical tensions. Upcoming elections worldwide this year will also heighten policy uncertainties for each country. Notably, the US presidential election in November could fuel uncertainties over global economic and trade policies, potentially deterring the global supply chain.

As inflation subsides, major central banks gradually cut their policy rates—led by the ECB and BOC. The Fed and BOE are expected to reduce policy rates in H2/2024, during which we anticipate another BOJ rate hike following an upward revision of medium-term inflation forecasts.

The Thai economy in 2024 and 2025.

Based on SCB EIC assessment, the Thai economy will slowly regain momentum, achieving 2.5% growth in 2024. The service sector will primarily drive the growth alongside an upbeat rebound in foreign tourist arrivals, supported by government initiatives such as free visas and visa-on-arrival (VOA), as well as the return of Chinese tourists. Additionally, domestic travel would grow steadily, with secondary cities gaining more popularity due to government’s tourism promotions. Nevertheless, Thailand’s economic fundamentals still face downward pressures from several factors: (1) Limited growth in merchandise exports, partly attributed to less correlation between the recovery of Thai exports and global trade volume, with exports of steels, fruits, and HDD expected to shrink this year; (2) Gradual rebound in the manufacturing sector, which is challenged by external pressures from increased competition with Chinese imports owing to overcapacity in China, and internal pressures from domestic demand slowdown; and (3) Despite an expedited disbursement of public investment spending after over six-month delay in the 2024 budget bill, it is unlikely to offset a sharp contraction experienced in the first four months of this year. As for 2025, the Thai economy will continue to rebound with a growth rate of 2.9%, driven in part by private investment rebound and government disbursement returning to normal levels.

Looking ahead, Thai economy will face heightened fragility in both the household and business sectors. (1) Households: low-income groups are lack sufficient financial buffers, such as precautionary savings and various types of insurance. (2) Businesses: despite signs of overall recovery, some firms remain highly vulnerable—especially small businesses grappling with rising debt amid structural challenges in Thailand’s manufacturing sector. Our assessment indicates that financial measures to these vulnerable groups will still take time to yield broad-based benefits.

Thailand's policy interest rate

SCB EIC expects the MPC to cut its policy rate to 2.25% by the end of 2024, with another cut to 2% expected in early 2025. Impetus from domestic demand will be hindered by household financial vulnerability, ongoing structural issues, tighter financial conditions, and heightened economic risks in 2025. The Thai baht remains highly volatile due to domestic political uncertainties and the Fed’s cautious approach to cut rate, despite some economic indicators falling below market expectations. In the short term, we expect the Thai baht to gradually strengthen to 35.80-36.80 THB/USD alongside Thailand’s economic recovery, with the year-end baht stabilizing around 35-36 THB/USD.

Geopolitical risk

Geopolitical tensions will heighten uncertainties and accelerate global economic decoupling. However, this could present an opportunity for Thailand's industry. The global trade landscape has been evolving as many countries rely less on trading partners in the opposite geopolitic blocs and rely more on those adopting with neutral stance. Maintaining geopolitical neutrality, Thailand stands to benefit from trade and investment diversions as global decoupling continues. Nonetheless, the implications to Thai industries can be categorized into two major groups: (1) Industries poised to benefit from global economic decoupling, such as computer & electronics and automobile & parts; (2) Industries facing more intense competition from other neutral countries, particularly regional competitors in exports to the US, such as textiles and electrical appliances.

To grab opportunities amid the escalating global economic decoupling, Thailand’s government policies crucially need proactive exports promotion alongside business strategies. These policies should also be tailored to manufacturing product groups in line with their specific contexts. Thus, we categorize them into four product groups based on potential gains or losses.

1) Products that Thailand excels but face intense competition: Government policies should emphasize enhancing productivity, value creation, and competitiveness. Meanwhile, Thai businesses should focus on promoting product strengths, targeting specific markets, formulating strategies to increase market share, and aligning product development with global trends.

2) Products that Thailand excels and face low competition: Government policies should encourage exporters to explore new markets for risk diversification and revamp production processes to meet environmental sustainability standards. Thai businesses should adapt by addressing climate risks and investing in renewable energy. 

3) Products that Thailand is inefficient but face low competition: Government policies should offer incentives for exporters to sustain current operations while investing in enhanced production capabilities and focusing on existing markets. Thai businesses should improve production technology and deepen the market understanding of target markets within the US and China blocs to accommodate changing in global demands effectively.

4) Products that Thailand is inefficient and face intense competition: Government policies should incentivize businesses in transitioning to high-potential sectors in the new global value chains. Meanwhile, Thai businesses should accelerate their integration into the new value chains and seek partnerships with more advanced technology.

SCB EIC expects the global economy to expand by 2.6% in 2024, close to the 2023 reading.

The overall outlook has improved thanks to enhanced momentum observed in Q4/2023 and upbeat economic activities in early 2024. Notably, activities in the service sector exhibited firm growth, while the manufacturing activities showed signs of rebound from a prolonged period of contraction. On top of that, the global economy is poised to gain impetus from more favorable global trade and subsiding inflationary pressures. Nonetheless, there remain headwinds, including high interest rates, ongoing geopolitical tensions, and global supply chain disruptions triggered by the Red Sea crisis and severe drought in the Panama Canal.

Central banks in major economies will start to pivot their monetary policy directions in Q2/2024.

The US Federal Reserve is likely to make three policy rate cuts (totaling 75 bps) this year, whereas the European Central Bank and the Bank of England may lower policy rate four times (100 bps) on the back of an inflation cooldown. In contrast, the Bank of Japan is expected to hike its ultra-low policy rate twice (20 bps), ending the long era of negative interest rates. Lastly, the People’s Bank of China will stay the course on an accommodative stance to support the flagging economy.

Thai Economic Outlook for 2024

As for the Thai economy, SCB EIC revised down our growth forecast for 2024 to 2.7% (from 3%), despite an overall outlook showing signs of a steady rebound. On a positive front, Thailand’s economy should gather momentum backed by promising prospects in tourism, robust performance in the service sector, and a resumption in demand-driven economic activities—driven by exports and private investment. Nevertheless, we expect a continued contraction in public spending in Q1/2024 owing to the delayed enactment of 2024 budget bill. Inventory accumulation is likely to remain high and also poses another challenge to an overall economic outlook. This is partly attributed to structural issues in Thailand's manufacturing sector, particularly concerning in  export competitiveness. Addressing such challenges will be crucial to facilitating a recovery in Thailand's industrial sector this year.

Despite several months of negative inflation, SCB EIC assesses that Thailand has yet to enter a recession. We anticipate inflation returning to positive territory in May, following the withdrawal of energy subsidies and a subsequent increase in domestic oil prices. Apart from that, upside risks remain from the global supply chain disruption aggravated by the Red Sea dispute, the climate crisis, and export controls imposed by some trading partners—which could potentially entail price surges in agricultural products such as rice and sugar.
As a result, the headline inflation should rebound to the target range in 2H/2024. We forecast Thailand’s headline and core inflation for 2024 at 0.8% and 0.6%, respectively.

Structural challenges in manufacturing sector will further deteriorate Thailand's long-term economic potential. Based on SCB EIC assessment, Thailand’s economic growth potential stood at 3.4% before the COVID-19 pandemic (2017-2019) but will recede to 2.7% in the long term (downgraded from 3% in the Dec 2023 assessment), underscoring a downtrend of long-term economic growth. These structural headwinds stem from 1) Wosening total factor productivity due to lower labor productivity and regulatory hurdles doing businesses; 2) Declining capital as shown by domestic investment decreasing by half to only 24% of GDP over the past two decades along with lower FDI attractiveness compared to ASEAN peers; and 3) Shrinking labor force, attributed to Thailand’s rapidly aging population.

SCB EIC expects the Monetary Policy Committee (MPC) to gradually lower the policy rate from 2.5% to 2% within 1H/2024 to maintain a neutral stance of monetary policy This follows the recalibration of monetary policy mechanism in response to escalating structural headwinds in manufacturing and the reassessment of Thailand’s long-term neutral rate. Our assessment shows Thailand's neutral rate has been lower to 2.1% (from the previous estimate of 2.5%). The anticipated rate cuts will not only provide room for the MPC to appropriately readjust monetary policy stance in line with structural change in the Thai economy. But, it will also alleviate the debt burden, particularly for vulnerable firms and households whose exposures mounting from high interest rates. The rate cuts will also shore up economic sentiment amidst subdued government spending this year. In the short term, the Thai baht will stabilize within the range of 35-36 baht per USD as external factors have already driven the previous baht appreciation. We anticipated the Thai baht strengthening to 33.50-34.50 baht per USD at the year-end, attributed to the weakening US dollar following the Fed’s rate cuts and improved outlook for Thailand’s economy.

Looking ahead, Thailand will confront with substantial challenges from structural issues in the manufacturing sector. While manufacturing is expected to regain in 2024 thanks to buoyant domestic and external demand for consumer goods, the industry continues to rely heavily on traditional supply chains. Thai economy is also intricately linked to China—notably the Chinese manufacturing supply chain—contrary to the shifting geopolitical landscapes. Apart from that, the sectoral capabilities to adapt themselves towards modern supply chains and evolving global demand have been slow. These challenges have hindered Thailand's export competitiveness, reflecting by the stagnant export share of global exports over the past decade.

Therefore, it is urgent for Thailand’s manufacturing sector to keep up with emerging sustainability trends, enhance technological development, and bolster resiliency in supply chain management. These efforts are essential for Thailand to  participate with and strengthen its footing in the modern global supply chain.

SCB EIC revised down its growth forecast for 2023 to 2.6% due to a much lower-than-expected Q3 GDP outturn, a large contraction in government spending, and lower tourist arrivals than the previous forecast partly due to a slow recovery of Chinese tourists. For 2024, the Thai economy will continue to grow at 3.0%. Exports will expand on the back of rising global trade growth. Private investment will pick up in line with exports recovery, increasing trend of investment promotion applications, as well as government policies to boost investment. However, the Thai economy in 2024 may recover slowly and grow at a lower rate than previously projected due to weaker economic momentum following a high growth of private consumption this year and a slower-than-expected recovery in household income, particularly the low-income group. Also, Chinese tourists recovered more slowly than expected. Public investment will expand at a low rate due to a delay in the FY2024 Budget Act. 

SCB EIC expects the Thai policy rate to be kept at the current level of 2.5% throughout 2024 regarding as a neutral rate, which is consistent with the Thai economy at its long-term potential and inflation remaining within the target range. Such neutral rate will also help balance Thailand’s financial system as real interest rate turns positive, reducing incentives for households to accumulate more debt and lowering underpricing of risks arising from a prolonged low rate environment. Nevertheless, inflation will accelerate somewhat next year driven by supply-side pressures which will lead to further cost passthrough of businesses. At the same time, the Digital Wallet scheme may boost economic growth beyond its potential level, creating demand-side inflationary pressures to some extent. However, the stimulus effect is expected to be temporary and the Thai economy will eventually return to its potential. Thus, this scheme is expected to have a limited impact on inflation so that it will remain within the target range of 1-3%. On the Thai baht, it is expected to stabilize within the range of 35-36 baht per USD for the remainder of this year and will continue to strengthen to the range of 32-33 baht per USD at the end of 2024 driven by fundamental factors as the Thai economy continues to recover, additional government stimulus, and the Fed’s policy easing outlook.

For the global economy in 2024, growth is expected to slow to 2.5% from 2.7% in 2023 due to the lag effects of monetary policy tightening among developed countries, as well as depleting excess savings especially in the US. Moreover, Chinese economy will likely slow down both in short term and medium term due to pressures from structural factors. In the medium term, the global economy is expected to recover despite growing at a lower rate than pre-Covid due to surrounding risk factors, especially geopolitics.  

Tightening cycle among major economies has come to an end. The Fed and the ECB will start the policy rate cut faster than expected in Q2/2024 given that inflation declines quite faster. The PBoC will likely continue easing monetary policy to stimulate the economy. Meanwhile, the BOJ is expected to scale back its monetary policy easing by lifting the yield curve control measure during the first half of next year and exiting the negative policy rate policy in the latter half of next year.

In the long term, SCB EIC is concerned about the Thai economy growing at a lower rate over a declining potential growth. This is a result of prolonged structural issues including low investment, lower total factor productivity, and scars from the Covid pandemic. Obviously, Thailand was ranked among the countries that have slowest recoveries from the Covid-19 crisis. Moreover, the Thai economy remains fragile and weak due to uneven recovery of households and businesses, especially low-income households and small businesses with high debts but slow revenue recovery. In addition, the Thai economy is facing rising uncertainties stemming from external factors, including climate change and geopolitical issues, and domestic factors such as government policies that must be monitored closely. Highly uncertain government policies could squeeze fiscal buffer for additional spending to address economic uncertainties and promote investment to enhance Thailand’s long-term potential.

SCB EIC proposes solutions to address Thailand’s structural issues following a set of “four enhancing policies”, comprising (1) enhancing immunity for households through the creation of comprehensive and adequate social assistance and social insurance mechanism; (2) enhancing competitiveness of Thai businesses through promoting trade competition, expiditing regulatory guillotine, and joining as member of the Organization for Economic Cooperation and Development (OECD) to accelerate Thailand’s access to OECD’s know-how and good practices; (3) enhancing national investment strategies to suit the changing global trends; (4) enhancing  sustainability of the Thailand’s real sector through government as a facilitator which will be the key factor enabling businesses to adapt to global trends in an efficient and sustainable manner. 

SCB EIC revised down the Thai economic growth outlook in 2023 to 3.1% (from 3.9%) due mainly to much lower-than-expected outturn in Q2 and continued export contraction. Still, there remains impetus from private consumption and tourism sector. Foreign tourist arrivals experience a buoyant recovery and will approach 30 million people as projected this year, particularly the Middle East visitors that could be Thailand’s new potential target. As a result, the service sector recorded a steady rebound and helped reduce fragility in the labor market. In 2024, we expect that Thailand’s economy will accelerate to 3.5% with an upbeat recovery in foreign tourists around 37.7 million. Also, private investment is expected to grow in line with the better trend of investment greenlights from Thailand's Board of Investment (BOI). Also, Thai exports will regain momentum and provide thrust to overall growth in 2024.


Headline inflation is expected to escalate since Q4, but should remain anchored within the target range at 1.7% in 2023 and 2% in 2024—driven by higher energy and food prices. Meanwhile, the core inflation will likely stay elevated at 1.4% in 2023 and 1.5% in 2024. SCB EIC anticipates another policy rate hike in the September meeting to the terminal point of 2.5% since the Thai economy will continue to regain its potential. Inflation will encounter upside risks from higher energy and food prices. The real interest rate should therefore return to a positive trajectory, that will support Thailand’s economic and financial stability in the long term by preempting the buildup of financial imbalances during a prolonged period of low interest rates.

 
The global economic rebound will be increasingly unsynchronized. Based on our forecast, the global economic growth should ascend to 2.4% in 2023 and stand steady throughout 2024. The global economy has been outperforming the consensus. Yet, we observed a persistent fragility that could continue into 2024—as a result of rampant inflation, policy rate hikes among major economies, and depleting excess savings. Furthermore, China’s economy will face a slowdown over the short and long term as structural challenges could hamper the growth outlook.


Advanced economies' rate hike cycle will come to an end within this year. Rising commodity prices could drive global headline inflation around the year-end. Likewise, core inflation in major economies should stay elevated as tight labor markets continue to support labor income. Against such backdrops, the US Federal Reserve tended to keep its current policy rate at 5.25-5.5% until Q2/2024. The European Central Bank and the Bank of England will slightly raise policy rates in the rest of 2023 and maintain their restrictive rates for the time being. Monetary easing is expected in 2H/2024 after core inflation subsides. In Asia, the People’s Bank of China has stayed the course on monetary easing to bolster a flagging economy. In contrast, the Bank of Japan will likely scale down its ultra-loose monetary policy—given signs of rising inflation. 
  

Looking ahead, The Thai economy will face with some major uncertainties. (1) China’s economic slowdown will hamper Thai exports, particularly products that engage in China’s supply chain and heavily rely on the Chinese market. The downturn in China will also somehow deter inward Foreign Direct Investment (FDI) from China and possibly weaken the demand of Chinese buyers in Thailand’s property market in some segments, and (2) Severe drought that is likely the most alarming in 41 years in many regions—according to our base case. This will potentially damage major crops such as off-season rice and sugar cane. Nonetheless, the farm income tends to remain unchanged in 2024 as higher crop prices should partly offset shrinking crop yields. In our baseline, the severe drought would slash Thailand’s GDP growth by -0.14 pp in 2023 and -0.36 pp in 2024, while it would drive inflation up by +0.18 pp and +0.45 pp in 2023 and 2024, respectively.
 

In addition, the new government policies also become a significant source of uncertainty. Massive stimulus plan, such as the digital wallet scheme, might help boost Thailand’s GDP growth to over 5% in 2024. Yet, the temporary growth must be traded off with longer-term fiscal burdens. Instead of a huge stimulus scheme, there is an alternative to facilitate the country by seeking for new growth engines to enhance our economic potential amid remaining economic scars from the COVID-19 pandemic as well as challenging environments from global value chain reallocation and climate change. Moreover, such a short-term yet massive government spending could deteriorate fiscal sustainability by accelerating Thailand’s public debt path to breach the public debt ceiling 70% of GDP around two years faster. This could also lessen room for fiscal space to cushion future uncertainties and to maintain overall fiscal stability.


SCB EIC proposes a set of long-term economic policy that should prioritize Thailand’s competitiveness and sustainable growth. (1) The policy should enhance Thailand’s competitive edges—both domestic and international levels—and broaden economic opportunities. To do so, the government can promote fair competition to improve the Trade Competition Act's effectiveness and support Thailand in joining the Organisation for Economic Co-operation and Development (OECD). As an OECD member, Thailand could benefit from expansive export markets while strengthening its footing in the global supply chain. (2) The policy should propel sustainable economic growth via tax policy restructuring to reduce inequality by avoiding tax policy schemes that could distort business or household decision-making.

SCB EIC kept its 2023 Thai GDP growth forecast at 3.9% given continued recovery in private consumption and tourism as well as services sector, despite subdued exports. 

The number of foreign tourists is still expected to be 30 million persons, while revenue from foreign tourists is likely to reach THB 1.27 trillion thanks to foreign tourist spending which has now rose to the level close to 2019 average. This will support the continued recovery in labor market, especially employment in tourism-related services sector. Meanwhile, Thai exports outlook remains subdued for the rest of this year and is considered a key downside risk to economic growth. SCB EIC revised down its forecast for Thai export value to 0.5% this year (from previously 1.2%) given subdued global demand, weaker-than-expected demand from the Chinese market, and an increased downside risk to the global economy. Moreover, in the baseline scenario, the Thai economy will likely face a mild to severe El Nino in the second half of this year. This is expected to cause damages to the agricultural sector by approximately THB 40 billion, which most of damages will occur next year. Headline inflation is projected to grow at a slow pace of 2.1% in line with lower domestic energy prices. However, there remains uncertainty surrounding government energy subsidies. Meanwhile, core inflation is expected to remain high relative to the past at 1.7%, reflecting a gradual cost passthrough to consumer prices and demand-pull inflationary pressures following Thai economic recovery.

SCB EIC revised down its 2023 global GDP growth forecast to 2.1% (from previously 2.3%).

This is due to weaker-than-expected economic outturns at the beginning of the second quarter, a highly divergent recovery between manufacturing and services sectors, and greater downside risks to the global enocomy during the remainder of this year. These risks include credit standards which will likely continue to be tightened, profitability of businesses which could be pressured by falling demand, high inflation and interest rates, and weaker business sentiments, as well as geopolical tensions which could possibly become more severe.

Major central banks are expected to raise policy rate no more than 1-2 hikes this year as core inflation tends to decline slowly given tightened labor market condition. 

Given that global headline inflation has declined faster than expected and real interest rates have gradually turned positive, global rate hike cycle is therefore likely to end soon. However, quantitative tightening policies of advanced economies could cause global liquidity to continue decreasing, which could affect emerging markets via capital flows and bond yields. 

The Thai economy following the election remains highly uncertain due to the new government formation and its policies.

SCB EIC, in the baseline scenario, expects the new government to be in place by August. This is expected to have a limited impact on government disbursement in this fiscal year as the interim government has accelerated capital budget disbursement and approvals of new investment projects before the parliament dissolution. However, there is a possibility that the new government formation could be delayed until late October, which will affect budget disbursement for FY2024. Moreover, implementation of key election campaigning policies will be key factors shaping the Thai economy going forward. In the baseline scenario, SCB EIC expects that the key policies of the leading parties in forming the next government will benefit consumption-related businesses including small businesses. Meanwhile, some businesses could be affected by the minimum wage increase policy and monopoly-related policy. Public debt is expected to rise in all scenarios of new government formation following implementation of campaigning policies, in addition to existing pressures from aging-related expenditures. This reflects the need for fiscal reform to promote fiscal sustainability.

SCB EIC expects the Thai policy rate to be gradually increased to terminal rate of 2.5% in Q3.

This is because the Thai economy is likely to continue expanding, while inflation has already resided within the target range despite upside risk from cost passthrough and demand-pull pressures. Looking ahead, Thailand’s financial conditions will continue to tighten. In the short run, the baht will still face weakening pressure due to strengthening USD and additional pressure on the baht from depreciating yuan. However, the baht will strengthen to the range of 32-33 baht per USD at the end of this year supported by Thai economic recovery outlook, improving investor confidence as political uncertainty subsides, and weakeningUSD following the end of the Fed’s rate hike cycle.

SCB EIC revised up Thailand’s economic growth forecast to 3.9% (previously 3.4%) in 2023, thanks to an upbeat rebound from the tourism and service sectors. Foreign tourist arrivals will likely hit 30 million in 2023 before resuming the pre-pandemic pace by late 2024. With China lifting its Zero-COVID restrictions, Chinese visitors should bounce back to around 4.8 million this year, alongside improving tourist arrivals from other countries. This would support the labor market and consumption recovery. Meanwhile, Thai exports outlook remained quite somber but would expect a 1.2% growth this year, thanks to a better-than-expected global economic growth and an upside rebound in Chinese demand. The Middle East, CLMV, and Latin America are also the potential markets for Thai export opportunities. On the domestic front, private investment is expected to gain traction in tandem with improving business sentiment and notable increases in the number of applications and certificates for investment promotional privileges. Moreover, the headline inflation is expected to stay within a target range at 2.7%, given falling global energy prices and ongoing energy subsidies from the government. Meanwhile, the core inflation will decline to 2.4% yet remain elevated, reflecting higher cost pass-through from producers to consumers on the back of stronger economic momentum and demand-pull inflationary pressures.

Somprawin Manprasert, Ph.D., First Executive Vice President, Chief Strategy Officer and Chief Economist of the Economic Intelligence Center (EIC) at the Siam Commercial Bank PCL, stated that “SCB EIC expects the global economy to perform better than previously forecasted. Hence, we upgraded our global economic forecast from 1.8% to 2.3%. An upward revision was attributed to key economic outturn which beat the consensus and China’s rapid reopening. The US and EU economies would eventually avoid recession. China's economy will witness robust growth, as the reopening after a three-year lockdown should unleash the pent-up private consumption. Furthermore, recent turmoils around the collapse of the US Silicon Valley Bank (SVB), following a liquidity crisis, could ripple the global financial market’s sentiment and liquidity in the short term. The SVB shutdown is unlikely a repeat of the 2008 crisis, yet considered an alarming risk that should be aware of. Another downside risk comes from the US-China geopolitical conflicts that could imperil the global economy, global trade, and global supply chain.”

He also added that “The global headline inflation will likely cool down along with  a decline in energy prices. In contrast, the core inflation—an important figure for the central bank’s decision—would fall back more slowly due to robust employment readings, which helped strengthen labor income and spending. As a result, we expect the major central banks to stay the course on rate hikes and keep their policy rate high for an extended period. The Fed will likely push its benchmark funds rate to 5.25-5.5% (previously 5.0-5.25%), while the ECB would raise its policy rate to 3.75% (previously 3.25%). Nonetheless, the pace of rate hikes should be slower than in 2022, and the global financial conditions this year will continue tightening, albeit decreasingly.

He stated that "In our view, the tourism sector and consumption would be the significant drivers for Thailand's economy in 2023. The return of international tourists should shore up businesses in the tourism ecosystem, particularly those with high reliance on Chinese tourists. Besides, Thailand’s labor market has regained its pre-pandemic momentum thanks to a buoyant economic rebound and workers returning to the tourism and service sectors, thus resulting in higher wages in the tourism industry.

He added that “There remain major downside risks ahead to the Thai economy: (1) Escalating geopolitical risks could disrupt the global supply chain and Thai exports, (2) Global financial conditions become acutely tightened as the global inflation eases slowly, (3) Swelling household debt would repress consumption, and (4) Political uncertainties might deter investment sentiment and future government spending. Moreover, arising concern in global stability became new risk that needed close monitoring. As long as the central banks can provide liquidity facility in a timely and sufficient manner, trust in the stability of banking system still remains.

Thitima Chucherd, Ph.D., Head of Economic and Financial Market Research of the Economic Intelligence Center (EIC) stated that “In case of global financial crisis resurgence, global economy might fall into a recession. EMs might encouter negative spillovers via four channels, namely, export slump, capital flight, tightening financial condition, and monetary policy divergence for those countries with external vulnerability being forced to hike rates more aggressively to shore up currency. Thai economy might also face adverse impacts on exports and financial conditions. Thai financial markets might encounter rising volatility similar to global financial markets. SET index might be shaken off following equity outflows, however, Thai financial markets would withstand rising volatility over the previous financial crises. Our analysis shows that rising volatility in overall financial conditions stress on financial conditions to some extent. Also, impacts of falling equity prices on Thai household wealth will be limited.”

She further added that “Still, household debt which remained persistently high could hamper future consumption—an alarming risk that calls for urgent solutions from the government. Based on the latest SCB EIC Consumer Survey, the share of respondents with expense outweighing income during the past six months has been on the rise, notably among the low-income cohorts. The number of newly indebted respondents also rose sharply since the COVID-19 outbreaks—most of them tended to borrow more for debt refinancing. In particular, borrowers with informal debt remained our top concerns as they are likely to borrow more and could get caught in a debt trap.”

She also pointed out that "The General Election 2023 is another issue that warrants close monitoring since it might affect the government expenditure. Still, this would primarily depend on how fast the new government could enforce the FY2024 budget decree. In SCB EIC base case, the upcoming election and the transition to the new regime will not significantly deter public spending in 2023. The reasons are that the current government has disbursed much of the allocated investment budget since early FY2023—the amount already surpassed those of previous fiscal years—and also gave the green light to new public construction projects. Hence, we expect a lower budget disbursement from the interim government during a transition, and the FY2024 budget decree should delay by no later than three months. However, if political unrest holds up the new budget enforcement further than our base case, the government spending in 2023-2024 would be adversely affected, particularly the public investment.”

SCB EIC expects the MPC to carry on the policy rate hike to 2% in H1/23, given a steady economic rebound and slowly easing inflation. Thailand's financial condition should tighten further as central banks globally opt for a policy rate increase, whereas financial supports start to peter out. The Thai baht is expected to weaken during H1/23 but regain steam against the greenback to 32-33 THB/USD at year-end 2023, backed by Thailand’s improving economic fundamentals. In contrast, the US dollar is likely to lose pace, notably after the Fed ends its rate hike in H2/23.

EIC revised up the Thai economic growth forecast to 3.2% (from the previous 3.0%) in 2022. An upward revision was attributed to a buoyant rebound in tourism and private consumption, following improvements in tourism and related service sector as well as labor income. However, the 2023 growth forecast is revised down to 3.4% (from 3.7%) since the signs of global economic slowdown became more apparent amidst rising uncertainties. Some major economies will soon enter a recession, and this would weigh down on Thai exports and investment ahead. Nonetheless, a solid rebound in tourism—thanks to the return of foreign arrivals—would provide significant support to Thailand's economy in 2023. EIC anticipated the return of 28.3 million tourist arrivals next year, considering high travel demand and China's easing of the Zero-Covid policy. Domestic tourism also regained its pre-pandemic pace, thus adding impetus to tourism revenue, related service sectors, and domestic consumption. Despite upbeat outlook, Thailand would still witness an uneven rebound as some households and businesses remain fragile. Regarding inflation outlook, headline inflation would be gradually declined and lied above the target at 6.1% and 3.2% in 2022 and 2023, respectively. Inflationary pressures still remain high due to high energy and food prices that somehow embedded in core inflation.

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 “We see a clearer sign of global economic slowdown this year and more to come in 2023, given rising uncertainties from elevated inflation, prolonged energy crisis, and synchronized monetary tightening worldwide. Some advanced economies—such as the UK and EU countries—will head for a recession by late 2022, whereas the US might also witness in H2/23. EIC thus downgrades the global growth forecast from 3.0% to 2.9% in 2022 and from 2.7% to 1.8% in 2023. In our base case, the global economy has yet to enter a recession since many countries would still record growth. For instance, China’s economy should make a steady rebound in line with the relaxation of Zero-Covid policy. Nevertheless, unexpected circumstances—such as the escalation of international conflicts or inflation surges which prompt tighter monetary policy responses—might also push the global economy into a recession.”

He further added that “Globally, high inflation is here to stay despite the figures in some countries already passing its peak. In particular, EIC expects that major economies will expereince inflation outstripping the central bank’s targets for the next 1-2 years. This is because inflationary pressures start to entrench and service demand strengthens after demand for durable goods eventually rebalance to normal. Hence, major central banks would carry on a tight monetary policy into 2023—albeit with slower rate hikes—and keep policy rates high until inflation settles back within the target. Going forward, fiscal policy will shift focus from fiscal stimulus towards more fiscal sustainability, since the COVID-19 crisis left many countries with massive public debt piles. Furthermore, given high uncertainties surrounding the global economy and monetary policy stance, global financial markets might face higher volatility and risks of market liquidity crunch alongside a tightening global financial condition. So far this year, risk-off sentiment took place resulting in a significant drop in risky asset prices worldwide. This would, in turn, hamper wealth effects and consumption ahead.”

Thitima Chucherd, Ph.D., Head of Economic and Financial Market Research of the Economic Intelligence Center (EIC), stated that “In EIC's view, the Thai economy will witness a modest yet uneven rebound. The tourism sector and consumption are the key drivers, whilst impetus from exports and investment significantly subside. As living costs and business costs remained high, some households encoutered their expense exceeding income, whereas firms recovered on uneven ground. This was evident in an increase in the number of fragile households during the COVID-19 pandemic. The figure stood at 2.1 million households or up 24% in two years. Businesses rebound unevenly. Firms that cater to demand from consumption recovery or align with the global trends were among the first to pick up. Meanwhile, some firms remained exposed to uncertainties and thus slowly recovered, given risks from global downturn and emerging mega trends.”

She also added that "There remain high uncertaines—from both domestic and external conditions—that overshadow Thailand's growth outlook in 2023. In our base case, the recession is somewhat unlikely and the Thai economy should return to its growth potential by the end of 2024. Yet, if major central banks hike policy rates further by 100 bps above our base case in 2023—for instance, if the Fed raises its policy rate to 5.75-6.00%—this might trigger a global recession. In this gloomy scenario, the probability of Thai economy entering a recession next year will be greater than 80%. However, the government still secures enough policy room to cushion uncertainty to the Thai economy, yet the fiscal space has been narrowing since the aftermath of the COVID-19 crisis.

As for the monetary policy outlook, we expect the MPC to raise its policy rate gradually (by 25 bps in each meeting) to 1.25% at year-end 2022, followed by another three rate hikes to 2% in H1/23. Such  gradual normalization approach would gear up the monetary policy stance in line with Thailand’s long-term economic growth path. Also, we believe the BOT will carefully adjust the pace of its policy rate hike to ensure that the policy normalization—both monetary policy and financial measures being gradually lifted next year—will not overly tighten financial condition and derail Thailand’s economic recovery in the wake of global economic slowdown and rising uncertainties.

Meanwhile, the Thai baht should continue strengthening until next year. The reason behind is that the US dollar tends to weaken as the Fed becomes increasingly dovish and the investor sentiment towards risky assets improves. In addition, the baht would gain impetus from Thailand's economic recovery—backed by current account surplus that likely continues into 2023, capital inflows to the Thai financial market, and inflation which tends to slow down faster than the US reading. In consequence, EIC anticipates the baht to hover around 36-37 against the US dollar at year-end 2022, before appreciating to 34.5-35.5 baht/USD at year-end 2023.”

In her closing remark, Thitima emphasized that "Looking ahead, Thailand's economy is still subject to downside risks, namely: (1) Sharp slowdown in the global economy that could deter exports and investment, (2) Uncertainties over China’s Zero-Covid policy which affect both incoming Chinese tourists and Thai exports, (3) High inflation, interest rates, and debt that left fragile households and firms further delayed recovery, and lastly (4) Political uncertainty which could dampen investor sentiment.”

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.”

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.

EIC revised down Thailand’s 2022 economic growth forecast to 2.7%, from the previous 3.2%. The downward revision was attributed to the Russia-Ukraine war, which sent energy and commodity prices soaring. This year, Thailand's annual average headline inflation will jump to a 14-year high at 4.9%, while domestic spending should pick up more slowly than our previous forecast. In particular, private consumption will be adversely affected by a decline in household purchasing power—on the back of surging fuel and food prices—and a sluggish rebound in labor wages, which currently fell behind living costs. Meanwhile, the increase in pent-up demand, driven by changes in consumer behavior with a better pandemic situation and lockdown easing, will be highly concentrated in upper-income households. Also, higher costs and falling profit margins will pressure firms to raise common product prices—passing on more rising costs to consumers—and hold up their investment amidst higher uncertainties.

 
The Russia-Ukraine war will take toll on Thai exports through a slowdown in the global economy—especially among the European nations—and exacerbated supply chain disruption. Overall, Thai exports are expected to witness a 6.1% increase this year. Still, the growth would mainly come from higher prices—especially from energy-related products, due to rising costs—rather than an increase in exports volume. For the tourism sector, an easing of entry restrictions and travel route reopenings among Asian countries would partly help offset a slowdown in tourist arrivals from Russia and European countries affected by the Russia-Ukraine war as well as higher travel costs. Hence, we expect Thailand to welcome around 5.7 million foreign tourists in 2022, a slight decline from our previous estimate of 5.9 million.

 
As for the labor market, a recovery in the service sector following the lockdown easing should help domestic employment resume growth momentum. Nonetheless, Thailand’s labor market remains fragile due to a sharp fall in working hours, more workers returning to farms, and the rise of an independent workforce. These trends have caused short-term problems from a sharp decline in labor earnings and longer-term dilemmas from an increase in long-term unemployment as well as lower access to labor welfare and skills training. Meanwhile, entrepreneurs still face migrant labor shortages whilst more Thai workers returned to their hometowns. In particular, construction and hotel businesses in big cities have experienced hardships due to labor shortages and higher operating costs, which could worsen an already-fragile balance sheet of SMEs. Furthermore, given such trends, labor wages would pick up at a slow pace, thus unable to cover rising costs of living. In 2021, real earnings (inflation-adjusted) of labor, particularly in Bangkok, shrank more than 10%.


Ballooning costs of living in line with global energy price rise will put more pressure on a rebound in spending of households who still grapple with economic scars—stagnant income from a subdued labor market and high household debt burden. Therefore, the government should still play a vital role to buttress economic recovery and alleviate impacts on households, especially the low-income group. Nevertheless, EIC views that fiscal deficits and rising public debt would constrain policy space, forcing the government to expend its budget more efficiently and direct fiscal measures more accurately towards the targeted recipients.

 
In particular, we observe that the recent diesel price freeze came with at least three unintended consequences: (1) Instead of cushioning impacts on low-income households, most subsidies benefited high-income cohorts who consume more energy — the top 20% of the high-income group has monetary gains of about 9.6 times higher than what households in the bottom 20% could attain. (2) Fuel price freeze that extends for too long would result in widening current account deficits, thus making this policy a large fiscal burden and an unsustainable measure that ensues economic risks if the government makes any abrupt policy change. For example, if the subsidies were withdrawn all at once, fuel prices might skyrocket and cause severe disruption to the Thai economy. (3) In the long term, subsidizing fossil fuels that fail to reflect true costs would only lead to structural problems— namely, low energy efficiency and too much reliance on fossil-based fuels.

 
For that reason, the Thai government should shift its policy focus to: (1) Adopting the managed float regime for energy price control, under which energy prices should be gradually lifted, without resisting a market direction, thus giving time for consumers to adapt and adjust. (2) Supporting the main policy with specific subsidies for low-income cohorts or public transport and logistics businesses, directing relief to the affected group. (3) Offering incentives to the private sector investing in renewable energy and enhancing energy efficiency, giving a short-term impetus to the economy and helping enhance Thailand’s energy stability in a longer horizon.

 
As for financial condition, Thailand’s headline inflation will likely exceed the target range of 1%-3% this year. Nonetheless, EIC expects the Monetary Policy Committee (MPC) to keep the policy rate steady at 0.5% throughout 2022. The reasons are that: (1) Maintaining growth of the currently fragile economy should remain MPC's top priority. (2) Accelerating inflation was primarily cost-push, and the racing pace will likely subside next year. (3) Policy rate hikes would exacerbate the debt service burden on households and SMEs, leading to NPL spikes and thus impairing financial stability. Meanwhile, we expect the Thai baht to be volatile and linger on the weaker side in the first half of 2022, given widening current account deficits—on the back of rising energy prices—and policy rate hikes among major central banks. The baht will return slightly to 32.5-33.5 against the greenback in late 2022, as promising tourism recovery helps improve the current account balance.

 
Overall, Thailand will likely see a slow economic recovery as inflation continues to rise and hover high throughout 2022, together with more limited policy space and lasting economic scars. Annual GDP growth is unlikely to return to 2019’s level until the latter half of 2023. Furthermore, there are still major downside risks to the Thai economy through the remainder of 2022: (1) Possible surges in already-high oil prices which might last longer than expected as the Russia-Ukraine war drags on. Given such circumstances, Thailand might fall into a long period of stagflation (bleak economy but high inflation). (2) Supply chain disruption in the manufacturing and transport sector, caused by China’s Zero-Covid strategy and international sanctions on Russia. The supply disruption may result in a larger-than-expected slowdown in the global economy—a big hindrance to Thai exports. (3) Tightening monetary policy of major central banks, particularly the US Federal Reserve (Fed), could lead to a more volatile and tightening global financial condition. (4) Slower recovery in tourist arrivals due to the Russia-Ukraine war and possible COVID-19 resurgence. (5) Scarring effects could be aggravated by higher living costs, thus broadly affecting the household's ability to service debt.

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EIC assesses that the Thai economy will grow faster than expected at 1.1% in 2021, up from the previous estimation of 0.7%. The upward revision follows the subsiding domestic outbreaks, rising number of vaccinated people, and easing governtment restrictions, which allow a resumption in various economic activities. Also, tourists arrivals are likely to pick up after Thailand’s re-opening and help bolster growth recovery. Meanwhile, Thai exports should remain robust thanks to a low-base effect from last year and global economic and trade expansion, although the recent COVID-19 resurgence in Europe and a supply bottleneck might weigh down on Thai exports during the end of 2021. The government has continued injecting money to buttress domestic consumption along with various relief measures to prop up the Thai economy.

As for 2022, EIC revised down our growth forecast from 3.4% to 3.2%. We expect a rebound in domestic and external demand, led by buoyant exports in line with an improving global economy and trade. Besides, the tourism sector will likely regain pace as higher vaccination rates in Thailand and other countries help facilitate international travel. So far, we anticipate around 5.9 million foreign visitors next year. Nonetheless, the new COVID-19 "Omicron" variant is a critical risk that warrants monitoring. Some early signs suggest that the new variant could be more transmissible and resistant to currently-available vaccines. However, we expect the adverse effects on the economy to be milder than those of Delta, as inoculation rates in Thailand and other countries are now higher, allowing for the government to exercise looser restrictions than before. Meanwhile, business sectors and households are better prepared for changing circumstances through growing e-commerce and online channels. Domestic spending is poised to regain pace in the short term, driven by the sectors gaining from pent-up demand and stimulus measures. Still, an overall rebound would proceed slowly due to scarring effects in the past two years: worsening household income, subdued labor market, and high debt burden. The government will still play a vital role to shore up economic recovery with an injection of the remaining THB 260 billion from the 500-billion-baht decree and large infrastructure investment. Yet, overall government supports will likely wind down as the economy is getting back on track.

Thailand’s economy is poised to rebound next year, but the pace should be slow and still lagging behind its full potential. As a result, output loss will be high and thus weaken future growth capacity due to slow investment and subdued employment. We expect the economy will return to its pre-pandemic 2019 level by mid-2023. In addition, there has been an alarming risk of new outbreaks as the Omicron variant started its wave in many countries. This is a major downside risk that might cause the Thai economy to grow weaker than anticipated. Therefore, the government should consider extra spending to reform the economy amid changing global contexts through labor upskilling and reskilling, support for digitalization among the SMEs and investment New S-Curve industries.

Aside from the emergence of the Omicron variant in Thailand and globally, Thailand's economic growth still faces other downside risks. First, new COVID-19 variants might emerge and cause widespread infections. Second, rising inflation due to a rapid increase in commodity prices and global supply bottleneck could affect the economy directly through reduced purchasing power and indirectly via tightening monetary conditions especially if the Fed raises the interest rate faster than expected. Third, the Chinese economy may slow down further from the over-leveraged property sector. Finally, deep scaring effects might aggravate further and thus hamper household and business’s ability to service debt.

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EIC revises Thailand’s economic forecast for 2021 downward to 0.7% from 0.9% previously following a severe and prolonged third-wave outbreak which led to adverse impacts on private consumption. In addition, foreign tourist arrivals have been lower than expected due to concerns about the outbreak. EIC expects the situation to improve in the beginning of the fourth quarter from a significantly higher rate of fully-vaccinated individuals, which would benefit confidence and domestic economic activity recovery. Exports have continued to expand but should slightly slow throughout the rest of the year from a higher base and the spread of the Delta variant, which caused the global economy to decelerate and resulted in supply disruptions in many manufacturing supply chains in Thailand and emerging economies in ASEAN. On the fiscal front, stimulus spending has continued through public consumption and investment, alongside various relief measures. Nonetheless, recent measures are still inadequate in terms of areas, duration, and amount. EIC expects the government to implement additional relief measures this year using the rest of the fund from the THB 1 trillion borrowing decree and an additional THB 200 billion from the THB 500 billion borrowing decree.

For 2022, EIC forecasts Thailand’s economy to grow 3.4% with recoveries in both domestic and external demand. Exports should continue to expand, albeit at a slower pace, in line with the global economy. In addition, higher vaccination rates in Thailand and other countries in Asia to a level that would allow the resumption of international travels would benefit tourism sector recovery, with a forecasted foreign tourist arrivals to Thailand at about 6.3 million people. In addition, domestic spending would also recover from a resumption of economic activity close to normal levels. However, the recovery would be gradual due to a significantly lower tourist arrivals compared to normal times and headwinds from deep scarring effects during the past two years such as worsening business dynamism, fragile labor market, and high debt levels. On the fiscal front, although public investment projects would continue to expand owing to investments from state enterprises and public-private partnerships, the support from fiscal policy would decline from the previous year as public consumption under the budgetary framework decreases. Additionally, the THB 300 billion remaining from the THB 500 billion borrowing decree is lower than the amount spent for additional fiscal stimulus in 2021.

Although the economy would recover next year, the recovery is still substantially below potential level resulting in a large output loss and could affect Thailand’s potential economic growth in the future with the economy expected to return to 2019 levels in mid-2023. Therefore, the government should consider additional borrowings to support the recovery and restructure the Thai economy. While the public debt level would increase above the ceiling of 60% of GDP, it remains manageable under the low interest rate environment and high liquidity domestically. The government must communicate a convincing fiscal consolidation plan in the medium-term in order to increase confidence in fiscal stability.

For monetary policy, EIC expects the Monetary Policy Committee to maintain the policy rate at 0.5% throughout 2021 and 2022 to support the economic recovery. The Bank of Thailand will focus towards increasing the efficiency of monetary policy transmission through various monetary policies in order to increase liquidity for households and SMEs. At the same time, the Bank of Thailand will encourage financial institutions to restructure loans according to problems faced by each borrower group in addition to considering intervention in financial markets to stabilize interest rates in the case of volatility caused by tightening financial conditions globally.

The Thai economy still faces significant downside risks from 1) a potential resurgence in COVID-19 cases both domestically and abroad especially if virus mutations caused vaccine efficacy to fall 2) Supply chain disruptions which could occur due to closures of domestic factories and production stoppages in trade partners within the same supply chain and 3) a more severe impact from scarring effects than expected leading to widespread consequences on households and businesses debt servicing.

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EIC projects the Thai economy to grow by 1.9% in 2021 (revised downward from 2.0%) after greatly impacted by domestic pandemic resurgence which is projected to take approximately 4 month (April-July) to contain, causing private consumption, especially face-to-face activities, to significantly decline. Meanwhile, foreign tourist arrivals is projected down to only 0.4 million persons despite reopening plans in the latter half of the year, as many countries remain cautious to ease restrictions for cross-country travels due to concerns for new COVID variants. Subdued tourism will add to deeper economic scars among businesses and workers, particulary in tourism related sectors. Nevertheless, the Thai economic growth will not slow down much further from previous forecast, owing to robust export growth in line with global economic recovery, especially among developed economies with advanced vaccination paces. Another equally important push factor is the government support from both 240 billion baht under 1-trillion-baht loan decree and projected additional 100 billion baht under newly launched 500-billion-baht decree. Going forward, the Thai economy is expected to gradually recover to reach pre-COVID level in early 2023 and still faces downside risks from possible longer-than-expected pandemic containment timeline and slow vaccination progress which could make economic recovery more fragile and delayed. Therefore, improvement in the vaccination pace to help boost confidence and jump start short-term economic recovery, followed by economic restructuring toward new normal standard, will be crucial for minimizing permanent output loss for the Thai economy.