New money isn't going into the real economy

The fundamentals of the US economy have not improved at all since the 2008 financial crisis. The US Federal Reserve’s “quantitative easing” (QE) money printing programme only helps out the big banks and buys up the US Treasuries. But the money does not go into the real economy to create jobs or jump-start fresh investments. 

But the US stock market, which previously peaked at the 14,000-plus level before crashing to around 7,000 in 2009, has reached a new historic high of 15,000 thanks to Uncle Ben Bernanke, the Fed chairman. Easy money has fuelled further speculation in risky assets and the stock market. 

Bernanke has indicated that he might taper off QE if the economy recovers or the unemployment situation improves. But the economy grew only 1.5 per cent in the first half of this year – a far cry from the normal growth rate of 3.5 per cent to assure normal employment creation. It is a clear case of a de-coupling between the stock market and the real economy. 

Thailand is heading in this direction. While the real economy is losing steam, the stock market is booming. This week the Bank of Thailand cut the economic growth projection by almost one full percentage point to 4.2 per cent on the back of slower export growth and domestic constraints. It stressed, however, that the economy should bottom out in the second quarter of 2013 and things should improve in the second half of the year. This assessment is too optimistic, given a marked slowdown in China, crisis in Europe and the uncertain US situation.

Let’s consider the four engines of Thai growth. Starting with exports, Siam Commercial Bank’s research revised export growth downward from 7 per cent to 3.7 per cent due to the China factor.

The second engine is private investment, which, according to the Thai central bank, has been cut to 5.4 per cent.

The third engine is domestic demand, which is the area of utmost concern. Thailand’s domestic consumption is being constrained by the bubble in household debt. Moody’s and the International Monetary Fund earlier warned about the bubbles in household debt and real estate and the deteriorating asset quality of the state-controlled banks.  

Household debt has now soared to almost Bt9 trillion, equivalent to 80 per cent of the gross domestic product. Easy consumer loans, credit cards and car loans have contributed to the sharp rise of household debt. Car loans alone have reached a staggering Bt1 trillion.

Many beneficiaries of the first-car programme, in which first-time car buyers are entitled to a Bt100,000 tax rebate, are now feeling the pinch from installment payments. Many of these people make only Bt15,000 a month, and they have to set aside Bt7,000-Bt8,000 of that to pay the installment. They cannot continue to service the loan for too long. The first-car programme covers 1.2 million cars. I have heard that 100,000 to 200,000 participants in this programme are already having a hard time paying the installments.

The fourth engine is government spending. The Bt2-trillion mega-project scheme is stalling in Parliament. The Bt350-billion water management project has got stuck in the Administrative Court. Fearing that the economy might weaken further in the second half of the year, the Finance Ministry is accelerating budget disbursement by Bt250 billion in the final quarter of 2013 to boost growth.

But the picture at the Thai stock exchange is the opposite. The stock market remains buoyant while other parts of the economy are faltering. Jarumporn Chotikasthira, the president, has revised daily trading volume from Bt32 billion to Bt49 billion. In the first half of 2013, trading volume averaged Bt60 billion, making the Thai exchange one of the most active stock markets in the region. Companies are also planning to go public. Initial public offerings this year have been revised upward from Bt120 billion to Bt180 billion. The stock market index has also been targeted at 1,650. Now, the index is around 1,488.

The US and Thailand have each seen a clear case of a de-coupling of the stock market from the real economy. If things go this way, we will have a dual economy – Wall Street versus Main Street; and SET Street versus Grassroots Street.