The biggest threat to every economic forecaster is the "lazy consensus", ie, the refusal to object to an accepted market view even if there is contradictory evidence.
If the consensus is later proved wrong, he or she simply says that other forecasters were incorrect as well. Hence, economic projections of different research houses are not likely to deviate widely. And that is also the case for this year’s economic projection for Thailand.
According to the “lazy consensus”, the Thai economy will perform marvellously this year, with growth rate of around 6-7 per cent. Four main reasons are cited.
First, domestic demand recovery is very strong. Numerous private consumption indicators such as revenue received from VAT and car sales, and investment indicators such as capital goods import volume, show strong signs of recovery. And the consensus says the strong trend is likely to persist through 2012.
Second, the government’s growth policies are expected to further stimulate the economy. The higher minimum wage policy and the rice-pledging scheme will promote further consumption, while the infrastructure construction and water management plans are projected to “crowd-in” further private investment.
Third, the market expects Thailand’s (as well as Asia’s) export sector to revive by the second half of this year, despite the export slowdown across the region. This expectation is mainly due to the rebound in demand from the US and core European economies. Increasing intra-regional trade is also expected to boost Thai exports.
And most of all, the consensus believes that, because of the very low base effect (Thai GDP contracted around 9 per cent YoY in the fourth quarter last year), this year’s fourth quarter will see a very high GDP growth (of around 15 per cent or more).
We at Kiatnakin Intelligence, the bank’s research arm, respectfully disagree. We have four reasons to believe that the Thai economy will grow considerably slower than others forecast.
Ironically, our first reason is the government policy to promote growth. As I wrote in a previous column, the government’s stimulation policies are likely to cause more harm than good. Announcing several populist policies, the government has increased its planned budget deficit to Bt400 billion, to be financed by issuing bonds. This bond issue will suck money out of the financial pool the private sector uses to finance its investment projects. Scarcer funds will lead to a higher market interest rate (despite low policy rate), reducing private-sector incentive to invest, and eventually hurting the overall economy.
Signs of this symptom are evident. The growth rate of both the monetary base (mainly banknotes and coins) and money supply (monetary base and other forms of bank account) reduced substantially in Q1 of this year. The decline in growth of bank loans to businesses is another confirmation of tightening financial conditions.
The second reason is to do with the rebound of private consumption and investment. We believe that the high growth of both components is temporary because it is mainly due to post-flood reconstruction and repurchase of machinery and durable-consumer goods. To achieve a constantly high domestic demand, particularly for investment, factors such as brighter prospects for the domestic and global economy and loosening of financial conditions are necessary. With the gloomy global economic picture and quite-tight domestic financial conditions, we doubt investment will grow as strongly as others forecast.
And that leads to the third reason for slower-than-predicted growth: the export sector. Despite other’s (as well as our) forecast that the global economy will perform better in the second half of this year (which implies strong export growth due to higher demand), certain risk still remains. The European debt crisis is ongoing. The risk has increased with the arrival of the new French and Greek socialist leaders. The situation in Asia, where the slowdown in exports of all 10 East Asian countries is visible, gives good reason to be worried as well. Although export growth will substantially increase in the latter half of this year, we expect that total export growth in 2012 will show a marked reduction from previous years.
The final reason for the pessimistic view is due to higher costs in general, be they living costs, production costs or financial costs. Sadly, this is partially self-inflicted by government policies designed to promote growth. The minimum-wage increase will undoubtedly lead to higher cost of production, especially for small businesses, which are the main source of employment. To counter the rising cost, businesses have three options: 1) raise prices, 2) lay off workers, or 3) shut down. Either way, the short-term economic impact might not be as bright as others expect. We fear that some sectors, especially labour-intensive ones like garment, leather bag/shoes and wood furniture production, will be badly damaged.
On the other hand, if businesses decided to pass the cost on to customers, price rises will be seen. Actually, the current price rise for several goods is partly due to expectations that incomes will rise, and partly due to a rise in production costs. The recent government handling of the situation, from the delay in announcing exports to the dubiously low inflation rate, is not helping either. In the public’s eye, the integrity of agencies responsible for reporting those figures is being compromised. And the situation will be worse if the government decides to stay put.
In sum, with so much visible downside risk, it is not a sure bet that Thailand’s economy will strongly revive this year. Investors, businessmen and women, and entrepreneurs should be prepared.