BOT sharply cuts 2013 growth forecast

Here is the full report:

The global economy continued to recover. However, growth projection for the Thai economy was revised downward in line with the more-than-expected moderation in domestic demand and delayed export recovery. Inflationary pressure continued to be modest.

The global economy recovered as previously assessed, with the strengthening of the G3 economies exceeding expectation slightly. The US economy picked up on the back of private consumption and investment in the housing sector. Euro area economies finally bottomed out, and both industrial production and private spending began to show signs of improvement. Meanwhile, the Japanese economy expanded favourably from the government’s economic stimulus measures, and China’s economy also improved. Nevertheless, growth of the ASEAN economies fell short of expectation, albeit only slightly, as a result of measures to address stability concerns. Overall, Thailand’s trading partners’ economies were likely to grow close to the previous assessment.

The Thai economy moderated more visibly than expected. The slowdown in private consumption persisted longer than anticipated, especially the purchases of durable goods after the expiration of the government’s first-car tax rebate scheme. Consumers were also more cautious in their spending in line with softening confidence and rising debt burden. At the same time, fiscal stimulus fell short of expectation due to delays in budgetary disbursement and extra-budgetary infrastructure projects. The latter was expected to be stepped up in 2014. In addition, export recovery took longer than anticipated given Thailand’s minor share in the growing market for high-technology products. Nonetheless, economic growth was likely to improve in 2014, with favourable household income and employment lending support for the return of private consumption to its normal growth trend. Continued fiscal stimulus, accommodative monetary policy, and recovery of the global economy would lead to a stronger export performance and encourage more corporate investment for capacity expansion and efficiency enhancement.

Inflationary pressure was slightly lower than previously assessed owing to softening demand and modest cost pressures. However, cost pressure was viewed to slightly increase going forward due to a gradual increase in domestic prices of liquefied petroleum gas (LPG) for household and transportation uses. In addition, the MPC raised the Dubai oil price assumption slightly to keep in line with the pace of global economic recovery, but continued to assume the exemption of diesel excise taxes throughout the forecast period.

In light of the economic assessment above, the MPC revised down its growth projection for both 2013 and 2014. Fragile global recovery and the possibility of further delay in public infrastructure spending caused the GDP growth fan chart to be tilted toward the downside over the forecast period and by slightly more than in the previous projection. Inflation forecasts were also revised down for both 2013 and 2014. With a possibility of lower demand pressure than assessed in the baseline case, inflation fan charts were slightly further downward-skewed compared to those previously assessed.

The MPC deemed the current accommodative monetary policy stance appropriate. In the meeting on August 21, 2013, the MPC judged that the global economy exhibited signs of gradual improvement. The Thai economy continued to soften in the second quarter, however, in tandem with consumption of automobiles and durable goods as well as export slowdown in line with subdued growth of the regional economy. In the periods ahead, domestic demand and exports were expected to gradually recover, with some risks of delay, while inflation was likely to remain subdued. The accommodative monetary policy was therefore necessary and appropriate for the ongoing adjustment of the Thai economy, while risks to financial stability and uncertainties regarding global financial conditions warranted continued monitoring. The MPC thus voted 6 to 1 to maintain the policy rate at 2.5 percent per annum.

In the latest meeting on October 16, 2013, the MPC judged that the global economy had improved gradually. The Thai economy grew more slowly than previously assessed but began to stabilize and show signs of improvement in some sectors. Key downside risks to growth stemmed from uncertainties about the timing of quantitative easing tapering and the fiscal impasses in the US that could intensify volatility in the financial markets and investors’ confidence in the future. On the domestic front, fiscal stimulus could be delayed further. The MPC thus viewed that the accommodative monetary policy remained appropriate in supporting economic recovery while inflation was still low, and voted unanimously to maintain the policy rate at 2.5 percent per annum.