Oil shock pushes Thailand closer to stagflation danger zone

Thailand has not yet entered full-blown stagflation, but the country is moving closer to a point where weak growth and rising prices could collide in a far more damaging way.

The warning signs have grown clearer as the conflict in the Middle East stretches beyond a month, driving crude oil prices higher and forcing a rethink of Thailand’s economic outlook for 2026. What had once looked like a year of modest growth is now being overshadowed by the risk of slower expansion, firmer inflation and deeper pressure on consumers and businesses.

Before the latest shock, Thailand’s economy had been expected to grow by around 2% this year, with average crude prices seen at US$58 to US$68 per barrel and inflation largely under control. Those assumptions are now being replaced by much harsher possibilities as global energy volatility feeds directly into domestic costs.

Stagflation is especially difficult to manage because it combines two problems that usually call for opposite policy responses. In a typical downturn, governments can try to stimulate growth. In a normal inflation cycle, they can tighten policy to cool prices. But when growth stalls at the same time as inflation rises, both options come with a cost. Measures to support growth can worsen inflation, while steps to curb inflation can push the economy down even further.

Thailand now faces four broad economic scenarios, with the outcome depending largely on how long the Middle East conflict drags on and how severely it disrupts global energy markets.

1. Conflict ends within two months

If the war remains contained and ends within two months, crude prices would average US$85 to US$95 per barrel. Thailand’s economy would still expand by 1.4%, but inflation would rise to 2.7%, already above a comfortable level.

2. Conflict widens and drags on for three to five months

In this scenario, crude would rise to US$105 to US$115 per barrel. Thai growth would slow to just 0.9%, while inflation would jump to 4.4%, making the risk of stagflation far more visible.

3. Full-scale war lasts six to nine months

This is where the damage becomes much harder to contain. Oil would soar to US$135 to US$145 per barrel, Thailand’s GDP growth would almost disappear at 0.2%, and inflation would hit 5.8%. The burden would fall especially heavily on low-income households.

4. Major powers are drawn into the conflict

In the worst-case scenario, if countries such as China, Russia and European powers are pulled in, meaningful economic forecasting would become almost impossible. The global economy would be heading into a severe recession on a scale not seen in decades.

One of the most serious risks for Thailand lies in the way domestic fuel prices have been managed. Long-running intervention and subsidy measures have left the Oil Fuel Fund under heavy strain. If global crude prices remain above US$100 per barrel for long enough and the state can no longer absorb the cost, diesel prices may be forced to adjust abruptly to reflect market reality. In that event, diesel could jump to THB60 per litre.

The consequences would be severe. A diesel increase of THB14.3 per litre would push headline inflation up by 4.56% and reduce private consumption by more than THB97.52 billion. Every THB1 increase in diesel would also shave about 0.02 percentage points off GDP.

For now, Thailand has not crossed into full stagflation. It is, however, moving into a clear danger zone. Growth remains below potential, inflation is being held down in part by state energy measures, and unemployment still appears low on paper. But that headline figure may not fully reflect the reality facing informal workers and people whose hours have already been cut.

At present, Thailand’s economy is growing at around 1.5%, below its estimated potential of roughly 3%. Inflation has not yet broken sharply higher, but if energy prices stay elevated for another three to four months, the picture could change significantly.

If stagflation does take hold, the impact will not be evenly spread.

The most vulnerable sectors are likely to be construction and building materials, where firms face rising energy and raw material costs but often cannot pass them on fully because contracts are fixed. Retail and wholesale businesses would also come under pressure as household purchasing power weakens. Manufacturers that rely on plastic resin could face additional strain if shortages worsen, while transport operators would continue to struggle with higher overall costs even if some fuel support remains in place.

Other sectors may prove more resilient. Energy companies and oil refiners would benefit directly from higher oil prices. Utilities would be better placed because of their steadier income streams and built-in pricing mechanisms. Parts of the agriculture and food sector, particularly exporters, could also gain from firmer commodity prices.

For households, the message is defensive. This is a time to cut unnecessary spending, preserve more cash and be cautious about taking on new debt, especially borrowing linked to floating interest rates that could become more expensive if monetary conditions tighten.

The same principle applies to investing. In a stagflationary environment, the usual approach of relying mainly on equities and bonds becomes less dependable because both can come under pressure at the same time. Bonds suffer if interest rates rise, while shares are hit as company profits are squeezed by higher costs.

Commodities and gold may offer better protection against inflation and geopolitical uncertainty. Defensive sectors such as utilities, energy, healthcare and global infrastructure may also hold up better because their income streams tend to be steadier and, in some cases, linked to inflation.

The government’s room to manoeuvre is limited as well. Broad stimulus may not be the right response in this kind of environment. A more practical approach is to cushion living costs in order to preserve purchasing power, rather than trying to force faster growth through large-scale spending.

The Oil Fuel Fund, in this context, works best as a temporary shock absorber, allowing prices to adjust gradually rather than holding them down indefinitely. Keeping prices artificially low for too long would create a long-term fiscal burden and distort market signals. More targeted support for farmers, fishermen, transport operators and state welfare cardholders would likely be more effective than blanket subsidies.

Thailand is not in stagflation yet. But the country is moving steadily closer to that line, and much will depend on how long the Middle East conflict lasts and how effectively the government manages domestic energy prices. For businesses and households alike, waiting until the shock fully lands may no longer be an option.