Consumer spending binge, but will it last?

ผู้เขียน: Dr. Sutapa Amornvivat

A strong growth in consumer spending has been the main engine for Thailand's economy in 2012. The consumer spending in the third quarter of this year increased over 6 percent relative to the same period last year. That was the fastest consumption growth rate since 2004 (excluding 2010 when the economy has just recovered from the global financial crisis).

This is generally seen as good news, considering that we need domestic growth to absorb shrinking exports to the ailing Western economies. But a very important question that emerges is whether such fast-paced growth is sustainable?

To answer this question, we must understand the main drivers of the recent increase in the private consumption.

First, the government has adopted a few fiscal initiatives to stimulate consumption spending. In particular, the incentive scheme for first-time car buyers has resulted in a very robust car sale this year. The data from the Office of Industrial Economics has shown that the sale of small automobiles in the first three quarters of 2012 rose by over 50 percent relative to the same period last year. In comparison, the sale of medium and large automobiles fell by 9 percent during the same period. Overall the Excise Department expects approximately 800,000 first-time car buyers to take advantage of the excise tax rebate.

While the program has succeeded in boosting car sales this year, a significant part of the sales may reflect the acceleration of households' car expenditures from the future years. This will likely depress car sales in 2013. Indeed, all major automakers expect a slight decline, or at best a smaller increase, in small-sized auto sales next year.

On the other hand, the tax rebates associated with the scheme will be handed out mostly over the next year. Because many first-time car buyers are cash-constrained, a significant portion of the rebate money will be used for extra consumer spending. Consequently those tax rebates will likely provide an important boost to consumer spending in 2013.

Several other stimulus measures, such as the tax incentive schemes for first-time homebuyers and soft loans for flood victims, will also expire soon. But their expiration will likely cause few ripple effects on the economy because the way they were implemented have made them a lot less effective than the first-time car buyer program. The tax incentive scheme for first-time homebuyers, for example, provides tax benefit in the form of a tax credit to be used gradually over the 5-year period. Thus, to really benefit from the program, a homebuyer has to have a significant amount of tax liability against which the tax credit can be used. This is in sharp contrast to the incentive program for first-time car buyers that simply hands out the cash rebate.

Second, the minimum wage hike in April 2012 has enhanced the purchasing power of many low-income workers. Evidence shows that businesses have absorbed some costs associated with the wage raise instead of completely passing them forward to consumers. Some manufacturers, for example, shift some of their operation to nighttime in order to utilize the cheaper electricity rate. The latest survey by the National Statistical Office indicates that the average wage in the second quarter of this year increased by over 17 percent relative the same period last year. With inflation at only about 3 percent, this implies strong income effects for low-income workers. Since the low-income workers have typically high marginal propensity to consume, those positive income effects likely have generated large impacts on consumption.

The second round of the minimum wage raise in January 2013 should further increase income for the low-wage workers. However, given the adjustments that many businesses have made in order to absorb the costs associated with the wage hike in April 2012, there may be less room for them to adjust their operation. It thus seems reasonable to assume that we will see more costs being passed forward to consumers. This will, to some extent, shave off the positive impact of the wage hike in 2013 as inflation ensues.

Finally the recent increase in consumer spending has been helped by the rapid expansion of household credit, especially among the low-income families. According to the National Statistical Survey's Household Socio-Economic Survey (SES), the debt-repayment-to-income ratio for households with monthly income lower than 10,000 baht increased from 45 percent in 2009 to 52 percent in 2011.  This ratio for the upper-income groups stayed roughly similar during the same period. This finding indicates a sizable increase in debt among the low-income households. With those being typically cash-constrained, the increasing availability of credit is likely to lift up their spending significantly.

Nevertheless, if the consumer spending is to continue to drive the economy, consumers must be in a sound financial position-that is, they must not be overburdened with debt. The debt-repayment-to-income ratio of 52 percent for the poor families suggests that the poor families are buried under a huge pile of debt.  Thus, these families are unlikely to be able to spend much more going forward.

In sum, the tax rebate from the expiring first-time car buyer program and the second round of the minimum wage hike will provide an important support to private consumption. So the answer to our question is yes-consumer spending will continue to drive the economy in 2013, albeit its growth not as big as it is in 2012. SCB EIC expects real private consumption to grow around 4 percent in 2013, a little lower than its 2012 growth rate. Also it is important to note that the domestic demand in 2013 will be given a substantial lift by various public investment projects. Increased consumer spending, coupled with government investment, will be the key to economic growth in 2013.