Cut in Thai growth forecast

The forecast for Thailand’s economic growth has been lowered to 4.2 per cent from 5.1 per cent in line with the delay in global recovery and moderating domestic demand, according to the Bank of Thailand’s Monetary Policy Report.

BOT Assistant Governor Paiboon Kittisrikangwan, who is also secretary of the Monetary Policy Committee (MPC), released the July issue of the Monetary Policy Report yesterday, which said the global economic outlook had softened because of weakened growth prospects in China and Asia. 

On the other hand, recovery in the US continues to gain traction on the back of improving domestic fundamentals, while the Japanese economy is benefiting from unprecedented stimulus policies, and the euro-area economy appears to be stabilising. The positive contribution from the Group of Three developed economies (US, Europe and Japan), however, could not entirely counteract the downside pressure from China and elsewhere in Asia. 

On the financial side, near-term market volatility is expected on the anticipation of the US Federal Reserve’s tapering off of asset purchases, which could induce further capital outflows from emerging markets. 

Given the slower growth in China and elsewhere in Asia, Thailand’s export recovery is expected to be delayed. On top of that, the vital contribution from domestic spending is forecast to lessen. 

Private consumption growth is projected to moderate in line with:

_ The boost from the government’s first-car tax-break scheme that has dissipated sooner than expected.

_ The accumulated household debt that is starting to weigh on purchases of durable and semi-durable goods. 

But looking ahead, household spending appears poised to resume a normal pace, thanks to favourable non-farm income and relaxed monetary conditions. Private investment is expected to grow at a lower rate, especially this year, according to the report. 

The report said that given their current excess capacity, businesses could manage to postpone investment awaiting positive developments of demand at home and abroad. Nonetheless, businesses need to improve their production processes, which coupled with their overall financial strength should allow investment to gather pace, the report advised.

Fiscal impetus has also declined from slow disbursement by local administrative organisations and delayed spending on water-management projects, Paiboon said.

He added that inflation readings would likely remain low. Both demand and cost pressure subside in line with moderated demand outlook and the lower projected path of global oil and commodity prices, coupled with the increase in domestic prices of liquefied petroleum gas that has been postponed for another two months, he said.

The MPC is assuming an exemption in diesel excise taxes throughout the forecast period.

In the light of the economic assessment, the MPC has lowered its projection for 2013 growth in gross domestic product. With risks tilted to the downside mainly from the fragile global economy and the possibility of further delay in public spending on water-management projects, the growth fan chart is downward-skewed over the forecast period, compared with the previous one that was balanced, Paiboon said.

This year’s inflation rate is now forecast to be lower than last year’s, in line with reduced demand and cost pressure. Inflation fan charts are slightly downward-skewed this time, reflecting the possibility of further weakness in domestic spending.

The MPC deemed the current accommodative policy stance as appropriate. In its meeting on May 28 and 29, the committee judged global economic recovery to be slower than expected, mainly in China and elsewhere in Asia. The Thai economy was likely to continue growing on the back of sound fundamentals, although downside risks had increased from weaker-than-anticipated economic momentum in the first quarter of the year. 

The MPC considered inflation to be well within the target, hence monetary policy had room to cushion further against risks to domestic demand. However, existing financial stability concerns also needed to be taken into consideration. The MPC thus voted unanimously to reduce the policy interest rate by 0.25 percentage points, from 2.75 to 2.50 per cent per annum. 

Then in its meeting on July 9 and 10, the MPC judged that the recent slowing in domestic demand was partly an adjustment from the rapid growth induced by government stimulus measures. A resumption to the normal path was expected on account of sound fundamentals and supportive monetary and fiscal policies. 

Meanwhile, the rapidly changing global economic and financial conditions, as well as risks to domestic financial stability, have warranted close monitoring. The MPC thus voted unanimously to maintain the policy rate at 2.50 per cent per annum.

The MPC viewed Thailand’s long-term outlook as still facing key structural impediments, including logistics, water-resource management, and constraints in the labour market. This arose from persistently slow growth both in the total workforce and labour productivity. Addressing these issues would require macroeconomic policies that put an emphasis on resolving production bottlenecks along with demand management.