Recession is in sight: Moody's Analytics

 

"The latest political developments could cause the economy to contract. Persistent political squabbling could also affect the long-term investment outlook and, by extension, the economy's growth potential," said its analyst, Fred Gibson.

He noted that The political outlook remains unclear. It is unknown how long the military plans to stay in power or whether the July elections will proceed. This is the second time in less than a decade that the military has overthrown the government. It drew a sharp rebuke from international leaders.

The first quarter GDP report released earlier in the week showed that the economy contracted 0.6 per cent year on year after expanding 0.1 per cent a quarter earlier. The slowdown in the domestic economy was broad based with household and business expenditure contracting. This aligns with the weak high frequency spending data and plummeting confidence. Two of the more worrying trends were the decline in tourism earnings, often a reliable source of growth, and sharp decline in investment.

The soft investment numbers confirmed reports of foreign and domestic firms shelving expansion plans as the messy political situation drags on. Manufacturing and construction investment, which account for 96 per cent of gross fixed capital formation, were particularly weak.

This coincided with slower credit growth over the first quarter. Within the manufacturing space, investment in autos (33 per cent of total investment) contracted 24.5 per cent y/y, following the 3.3 per cent decline over 2013. Thailand is hoping to become the leading automotive producer in Asia, but persistent disruptions, first from the floods in 2011 and now from the political environment, pose downside risks to autos investment and production. On the upside, electronics investment rebounded 6.6 per cent after falling 7.9 per cent in 2013. Thailand’s low cost labour force continues to attract investors into manufacturing, but with capital and equipment increasingly mobile the country's ongoing political uncertainties could cause investors to shift operations to neighboring ASEAN countries.

Construction-based investment declined by 12.2 per cent y/y in the opening quarter. The political limbo and limited ability of government to approve new spending have crimped public construction, which fell 23 per cent after contracting 2.6 per cent in 2013. The outlook for public investment remains grim after the Constitutional Court ruled the government's proposed infrastructure bill illegal. This project was expected to add US$61.6 billion to the economy over the next six years.

Meanwhile, tourism has grown 9 per cent a year since 2000 and now accounts for 10 per cent of GDP. 

"However, violence from the political protests and widespread media coverage is now weighing on the industry," Gibson said. 

Foreign arrivals fell 6 per cent on year in the March quarter after growing 18 per cent in 2013. For comparison, arrivals fell 1.6 per cent during the Thai floods in late 2011. Private consumption by non residents - a proxy for real tourism earnings - declined 6.5 per cent after growing 21.4 per cent in 2013. 

"The coup will likely cause further declines over the coming quarters," he noted.

Merchandise export volumes were one of the few positives from the GDP report, rising 0.8 per cent on year after growing 0.2 per cent in the fourth quarter. Gradual improvements in the tech cycle are supporting electronic exports. Risks to exports are tilted to the downside as the outlook across major trading partners has

softened. The higher sales tax in Japan is expected to weigh heavily on growth over the coming quarters, with knock-on effects for Thai exporters.  Moody's Analytics has lowered the US 2014 GDP forecast to 2.6 per cent from over 3 per cent earlier with the weak first quarter GDP numbers and softness in the housing market. 

"Given recent events we now think the economy will record a second negative quarter in the three months to June, putting it in recession," Gibson noted.