Europe key issue: economists

All countries including Thailand will have to keep a close watch on Europe’s debt crisis in 2012, while public and private investment will play a key role in driving the domestic economy, economists said.

Thailand is expected to see a sharp recovery after the nation’s worst floods in decades but it cannot escape from the global economic worries.

“The Thai economy is expected to rebound early next year in response to reconstruction and fiscal stimulus and as manufacturing returns to full capacity,” HSBC Global Research said in its report.

Given the global economic jitters, HSBC lowered its estimate for Thai economic growth in 2012 to 4.0 per cent from 4.5 per cent.

HSBC still sees downside risks to the forecast, stemming primarily from a potential escalation of the European sovereign debt crisis.

Besides portfolio outflows, rising market volatility and widening risk premiums, exports are cooling off, HSBC said.

The global uncertainties, the expected European recession and the fragile and weakening US economy are projected to slash demand for Thai exports, said Usara Wilaipich, senior economist at Standard Chartered Bank (Thai).

StanChart forecasts growth in gross domestic product at 3.5 per cent next year.

“Our growth forecast is below the current consensus because of external risks,” she said. The current market consensus for 2012 growth is 4.5-5.5 per cent.

The European debt crisis is expected to direct the global economy next year.

In 2012, Europe is expected to enter a recession. The United States could see its growth weaken and become fragile. There is a possibility of more stimulus in US monetary policy through a third round of quantitative easing. Through trade ties with those two economies, China is expected to register slower growth amid concern over a hard landing.

“Thailand is likely to be affected by the global economic slowdown next year,” the StanChart economist said.

Prasarn Trairatvorakul, governor of the Bank of Thailand, said last week that risks to growth remained next year, with the European debt crisis and Thailand’s economic recovery after the floods. “This year, the cloud [the European debt crisis] is grey and has become darker. We’re afraid of it turning black,” he said.

The central bank is also monitoring the Kingdom’s economic recovery after the floods, which is expected in the second quarter. If the recovery does not come as expected, monetary policy may need to be adjusted, he said.

Monetary policy now is accommodative to support the economic recovery. “However, the recent policy-rate cut does not signal a downward trend, as inflation remains relatively high, though not accelerated,” Prasarn said.

The Monetary Policy Committee trimmed the policy rate by 25 basis points to 3.25 per cent at its last meeting of this year, on November 30, citing the worse-than-expected damage from the floods.

Mild inflationary pressure is expected next year with average headline inflation of 3.0 per cent, according StanChart. 

The headline figure is projected at 3.7 per cent for this year.

Pressures from the likely rises in food prices after the floods could be offset by the government’s measures to reduce the cost of living reduction and lower global oil prices, StanChart said in its “Global Focus – 2012 – The Year Ahead” report.

Meanwhile in its “Asia Pacific Economic Outlook”, Deloitte Research said: “The impact of the flood will likely be temporary. On the other hand, global economic uncertainty, especially in the US and Europe, could pose a bigger threat to the Thai economy.” 

Somchai Sujjapongse, director-general of Fiscal Policy Office, said public and private investment in post-flood recovery reconstruction would play a key role to drive the economy. Consumption partly driven by wage hikes comes second in boosting economic growth. Exports adversely affected by the uncertainty of the global economy will not play as much of a role in driving the economy as it did this year, he said. Somchai expects GDP to expand 5 per cent next year.

Bandid Nijathaworn, a former deputy BOT governor, said the public should not be misled by higher growth next year, as it comes on a very low base of less than 2 per cent in 2011. Some estimate only 1.3-1.5 per cent GDP growth this year.