Thailand's Growth Stalls as Energy Shock and Trade Uncertainty Grip the Region, World Bank Warns

 

 

Thailand is among the most exposed economies in East Asia and the Pacific, the World Bank says, as compounding external shocks test the resilience of an export-dependent region — though a rebound is forecast for 2027.

 

 

Thailand is forecast to grow at just 1 to 2% this year, a figure the World Bank attributes in significant part to a failure to advance structural reforms — even as the broader East Asia and Pacific region grapples with an energy shock, rising trade barriers, and a pervasive climate of policy uncertainty that is suppressing investment and eroding the quality of jobs.

 

The warnings came on Wednesday as the World Bank released its latest East Asia and Pacific Economic Update, which projects regional growth will decelerate from 5.0% in 2025 to 4.2% in 2026 before recovering to around 5.0% in 2027 as geopolitical tensions ease. 

 

For Thailand, the picture is more sobering. The country is identified as one of the more exposed economies in the region, facing higher energy import costs, a direct hit from US sectoral tariffs on auto parts, and limited room to manoeuvre on fiscal and monetary policy.

 

 

 

 

Thailand in the crossfire

The conflict in the Middle East has pushed up oil and gas prices significantly, with futures markets suggesting prices could remain as much as $20 higher per barrel than before the crisis began. Thailand, as a net energy importer, is acutely exposed. 

 

The World Bank estimates that a sustained 50% increase in fuel prices could reduce household incomes across the region by 3 to 4%, with the heaviest burden falling on lower-income households, who devote a larger share of their spending to energy.
 

 

 

 

 

On trade, Thailand faces a specific vulnerability through its auto parts industry, which is directly in the line of fire from US tariffs.

 

The Bank estimates that the tariff impact could shave around 0.5 percentage points or more off Thailand's GDP. 

 

Overall, US tariffs on East Asian and Pacific economies now stand roughly nine percentage points higher on average than in 2024, at around 14%, following successive rounds of US measures, legal challenges and new impositions.

 

The Thai baht has depreciated by approximately 5% amid the broader regional financial turbulence, while capital outflows and widening bond spreads are adding to financing pressures across the region.

 

 

 

The deeper problem, however, is one of the country's own making. 

 

"A country like Thailand is growing today at 1 to 2% because there have been no significant structural reforms," said Aaditya Mattoo, the World Bank's director of Research, who presented the findings at a media briefing. 
 

 

He pointed to the failure to liberalise the services sector as a particularly costly missed opportunity, noting that targeted services reform in Vietnam had simultaneously lifted productivity in both services and manufacturing.

 

Thailand's financial sector remains heavily restricted to foreign investment, and competition in transport services is constrained in ways that raise costs for downstream industries.

 

The World Bank also noted that Thailand has ambitions to transition its automotive industry — in which it has been a significant regional player — away from internal combustion engines and towards electric vehicles.

 

Whether it can execute that shift successfully will depend in part on the structural and skills investments it makes in the near term.
 

 

 

 

 

Three shocks bearing down on the region

Thailand's difficulties sit within a broader regional picture that the World Bank describes as one of compounding external pressures. Three forces are bearing down simultaneously.

 

The first is the energy shock from the Middle East conflict, which affects the region through multiple channels: higher production costs for energy-intensive industries and agriculture, disruption to maritime supply chains and shipping costs, tighter financing conditions as investors seek safe-haven assets, and weaker remittance flows from Gulf-based migrant workers.

 

The Philippines, where remittances from the Gulf account for around 1.5% of GDP, faces a particularly direct exposure through this channel.

 

The second is the combination of elevated tariffs and — more damagingly — the uncertainty surrounding future trade policy. While the tariff increases are quantifiable, the report argues that the inability of firms to plan around a stable trade regime inflicts a deeper, more sustained cost. 

 

The tariff differential that ASEAN economies once enjoyed over China in the US market has narrowed sharply, from around 26 percentage points to just 1.5 points. For Vietnam, which depends heavily on exports, the Bank estimates that the change in the trade regime could reduce income by as much as one percentage point.

 

Critically, uncertainty appears to be changing not just the level but the nature of employment. Firms operating in an unpredictable environment are increasingly relying on temporary contracts, contributing to a broader trend the Bank characterises as a "new informality" — a growing gig and platform economy in which workers lack stable employment and social protection.

 

The third factor is the divergence in vulnerability across the region. Laos, Mongolia, Cambodia, and the Pacific island nations face the most acute pressures, given their energy dependence, existing inflationary conditions, and limited fiscal space. Laos' gross government debt exceeds 80% of GDP, with foreign reserves covering barely two and a half months of imports.

 

 

 

 

A digital silver lining — with caveats

Against this difficult backdrop, the report identifies one significant positive development: the region is riding the wave of the global artificial intelligence boom.

 

AI-related exports are now among the most dynamic in the region, and investment in data centres has surged — particularly in Malaysia, but also in Thailand and Vietnam.

 

However, the World Bank cautions that the region is less well-positioned than it might be to harvest the deeper productivity gains AI could offer.

 

Connectivity infrastructure remains weak in many economies, and foundational skills gaps are pronounced. The report estimates that only 13 to 17% of multinational subsidiaries in China and Thailand currently use AI — roughly one-third of the proportion seen in advanced industrial economies.

 

"The worrying thing is that AI offers big increases in productivity, and our region may today be less equipped to take advantage of those benefits," Mattoo said, pointing to weaknesses in both infrastructure and foundational education as key constraints.
 

 

He noted that most workers in East Asia and the Pacific are in routine, manual occupations that face greater displacement risk from automation and robotics than from AI specifically.

 

But the risk of failing to build the complementary skills needed to work alongside AI — and thus missing the productivity dividend it offers — is very real.

 

 

 

Industrial policy: lessons from the region

A special focus of this year's report examines industrial policy in the digital age. The findings are instructive for Thailand as it navigates its EV transition and broader industrial strategy.

 

South Korea's targeted support for heavy manufacturing produced demonstrable gains in output, labour productivity and employment, with costs broadly justified by the returns. 

 

The key ingredients were sound economic foundations — infrastructure, education, effective institutions — combined with an openness to trade and investment. 

 

China's intervention in shipbuilding lifted its global market share from below 10% to nearly 50%, though the most rigorous analysis suggests the benefits fell short of the costs, illustrating that impact and efficiency are not always the same thing.

 

 

For Thailand and its peers, the report's central message is that industrial policy works best when built upon sound economic foundations, and when it is accompanied by the removal of distortionary barriers — particularly in the services sector. 

 

"Even targeted industrial policy works best when it is accompanied by efforts to improve foundational public goods and eliminate policy distortions," Mattoo said.

 

Vietnam is held up as a model of sorts: having grasped difficult reforms, including a recent restructuring of government ministries, it has built a manufacturing base — most visibly in mobile phones — that has absorbed the introduction of automation without significant job losses, because the scale of production increased alongside it.

 

The same dynamic, the Bank suggests, could apply to AI adoption if the underlying skills investments are made.

 

 

 

 

The policy prescription: support now, reform for tomorrow

On the immediate policy response, the World Bank urges governments to strike a careful balance. Fiscal support should be targeted — towards lower-income households and small and medium-sized enterprises — rather than broad-based, which risks worsening debt positions and pushing up borrowing costs. 

 

Countries that built digital social registries during the Covid-19 pandemic are better placed to deliver such support swiftly and precisely.

 

Central banks face a particularly difficult dilemma. The energy shock threatens to feed into broader inflation, yet tightening monetary policy risks choking off already-fragile growth.

 

Where inflation expectations remain anchored and the shock is clearly supply-driven, the Bank suggests policymakers may be able to look through short-term price pressures.

 

The longer-term prescription is more structural: invest in infrastructure and skills, remove non-tariff barriers in goods and services, and liberalise unnecessarily restricted services sectors.

 

 

 

 

The Bank estimates that the economic gains from such domestic reforms would considerably outweigh the costs of the external headwinds now bearing down on the region. 

 

"Countries have the power to forge their own destiny," Mattoo said. "Their own reforms would produce gains which are many multiples the cost of foreign trade protection."

 

For Thailand, that message carries particular weight. With growth stuck at the lower end of the regional range and structural reforms long overdue, the World Bank's report is as much a call to action as it is an economic forecast.