BEHIND THE NUMBERS
If anything, this year has proved the Thai economy is able to stand on its own feet. It's the year that domestic growth ploughed ahead against the backdrop of a slowdown in exports. Over three quarters, the economy expanded by 2.6% year-on-year. Not much, you may think, but recall that in the first quarter of this year we emerged from major flooding, so you can pencil out any manufacturing activity for one whole quarter.
The boost from private consumption and investment returned in the aftermath of the floods, lifting Thai economic activity in the second and third quarters and bringing economic growth back to a solid expansion path. The strength of domestic growth was due to the highest quarterly rates since 2004 of the two contributors in the third quarter, at 6% year-on-year for private consumption and 15.5% for investment, while exports of goods and services contracted 2.8% year-on-year in the same quarter. So yes, the Thai economy can expand even when exports are stagnant, but it requires a tremendous amount of growth from all domestic sectors at the same time, not just consumption.
Such strong domestic demand has led to a surge in imports, generating a trade deficit for the first 10 months of 2012 at US$14.3 billion. One has to go all the way back to 1996 to find a trade deficit this high. But all in all, including fourth-quarter expansion from the low base of the last quarter of 2011 (when the soaked economy contracted by 9.3%), we expect the economy to expand at a nice round number of 5% this year.
Despite the seeming strength of the Thai economy in 2012, we are carrying a lot of burdens into 2013. For one, export-oriented sectors remain weak due to the global slowdown and are now operating way below their capacity. Admittedly, the global outlook has improved, with positive data releases from China and the US (minus the effects of superstorm Sandy).
The US economy in particular is threatened by a political stalemate over its "fiscal cliff". The details of this sad political soap opera have been well covered by the media, and there's no point in repeating them here. However, the worst-case scenario estimated by the bipartisan Congressional Budget Office puts US economic growth at -0.5%. That figure appears frightening in light of the memory of the sub-prime crisis that pulled the Thai economy down by 2.3% in 2009. Recall, however, that in that very same year, the US economy contracted by 3.5%, a much more severe fall than even the worst "fiscal cliff" scenario.
An estimate by TMB Analytics shows that in the worst case, the fiscal cliff may knock 1% GDP growth from Thai economic performance next year. And even after losing that 1%, the Thai economy will still be expanding. So what we are saying is don't worry. In addition, we think politicians will find their way, because the patience of American voters grows thinner and thinner every day.
Therefore, export markets should look better next year, but not all problems will be resolved. Whether the recovery will be strong enough to support global trade and Thai exports remains to be seen.
The domestic economy also provides something to worry about. It is true that consumption has been strong, but the strength of private consumption has stemmed from two sources. First, the recovery from the floods led to a major spending spree at the beginning of the year to rehabilitate properties and replace damaged household items. The second factor was the stimulus provided by government policies, especially the 300-baht daily minimum wage, the rice pledging scheme and the first-time car buyer tax rebate. So the growth in consumption was in a way inorganic and will not be sustainable over the long run.
Let's begin with the 300-baht policy. The big increase in the minimum wage already happened this past April, when wages rose by 35-40% across the board in each province and slightly more, to 300 baht, in the seven most developed provinces. The final move to bring the minimum in the other 70 provinces up to 300 baht (the current lowest wage, in Phayao, is 222 baht) is scheduled for Jan 1. Because wages in these provinces were already increased by 40% in April, the average increase in this round will be just over 20%. Keep in mind also that about 20% of labourers work in the seven most developed provinces where the 300-baht wage is in place already, so no more increases for them.
In other words, the effectiveness of higher wages in increasing purchasing power will be smaller this time around, although the impact on businesses is fairly large, especially in the least developed areas of Thailand, where entrepreneurs find it harder to adapt.
Rice pledging is the most fiercely debated policy of the current administration. Although it puts more money in the hands of rice farmers, the financial burden of the scheme has strained government finances for the future. We already see cuts in some planned budgets in this fiscal year in order to move more money towards more "popular" policies. What this means for the economy is simply an increase in private consumption at the expense of other government spending.
The first-time car buyer tax rebate, meanwhile, has benefited the automotive industry greatly. It has performed so well that it accounts for virtually all the growth in manufacturing this year. But removing the auto industry will reveal that other manufacturing sectors are still performing at a subpar level, particularly export-oriented industries such as electronics and parts, rubber products and seafood. The first-time car buyer scheme will end this year, leaving open the question of what will carry manufacturing in the second half of 2013 once the steam from the automotive industry runs out.
In aggregate, we expect the Thai economy to expand at a healthy pace of 4.7% in 2013.
Exports will perform better, growing by more than 7%, and private consumption and investment will grow at more organic rates of 4% and 8%, respectively.
While the private sector will return to more normalised growth rates, we have placed a lot of hope in public investment, expecting growth of 14%. Other economists are even more optimistic about that figure. Even though this is the only area that will produce inorganic growth next year, let's wait and see if economists will be heartbroken two years in a row over the missing public investment.
TMB Analytics is the economic analysis unit of TMB Bank. Behind the Numbers is authored by Benjarong Suwankiri, the head of TMB Analytics. He can be reached at firstname.lastname@example.org
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Writer: TMB Analytics