Strong growth in consumer spending has been the main engine for Thailand's economy in 2012. Consumer spending in the third quarter of this year increased by over 6% relative to the same period last year. That was the fastest consumption growth rate since 2004 (excluding 2010 when the economy had just recovered from the global financial meltdown).
Consumer spending will continue to drive the economy next year, thanks to tax rebates from the first-time car buyer programme along with the minimum wage hike. KOSOL NAKACHOL
This is generally seen as good news, considering that we need domestic growth to absorb shrinking exports to the ailing Western economies. But a very important question that emerges is whether such fast-paced growth is sustainable.
To answer this question, we must understand the main drivers of the recent increase in private consumption.
First, the government has adopted a few fiscal initiatives to stimulate consumer spending. In particular, the incentive scheme for first-time car buyers has resulted in very robust car sales this year. Data from the Office of Industrial Economics has shown that sales of small automobiles in the first three quarters of 2012 rose by more than 50% relative to the same period last year. In comparison, sales of medium and large cars fell by 9% during the same period. Overall, the Excise Department expects approximately 800,000 first-time car buyers to take advantage of the excise tax rebate in 2012.
While the programme has succeeded in boosting car sales this year, a significant part of the sales may reflect the acceleration of households' car expenditures in the short term. This will likely depress car sales in 2013. Indeed, all major automakers expect a slight decline, or at best a smaller increase, in small-sized auto sales next year.
On the other hand, the tax rebates associated with the scheme will be handed out mostly over the next year. Because many first-time car buyers are cash-constrained, a significant portion of the rebate money will be used for spending on other consumer goods. Consequently those tax rebates will likely provide an important boost to consumer spending in 2013.
Several other stimulus measures, such as the tax incentive schemes for first-time homebuyers and soft loans for flood victims, will also expire soon. But their expiration will likely cause few ripple effects on the economy because the way they were implemented has made them a lot less effective than the first-time car buyer programme. The tax incentive scheme for first-time homebuyers, for example, provides a tax benefit in the form of a tax credit to be used gradually over a five-year period. Thus, to really benefit from the programme, a homebuyer has to have a significant amount of tax liabilities against which the tax credit can be used. This is in sharp contrast to the incentive programme for first-time car buyers that simply hands out the cash rebate.
Second, the minimum wage hike in April 2012 has enhanced the purchasing power of many low-income workers. Evidence shows that businesses so far have absorbed some costs associated with the wage boost instead of completely passing the higher costs on to consumers. Some manufacturers, for example, have shifted some of their operations to night time in order to utilise the cheaper electricity rate. The latest survey by the National Statistical Office indicates that the average wage in the second quarter of this year increased by over 17% relative to the same period last year. With inflation at only about 3%, this implies strong income effects for low-income workers. Since low-income workers typically have a high marginal propensity to consume, those positive income effects have likely generated major impacts on consumption.
The second round of the minimum wage hike next month should further increase incomes of low-wage workers. However, given the adjustments that many businesses have made in order to absorb the costs associated with the wage hike in April 2012, there may be less room for them to adjust their operations. It thus seems reasonable to assume that we will see more of the labour costs being passed on to consumers. This will somewhat lessen the positive impact of the wage hike in 2013 as inflation ensues.
Finally, the recent increase in consumer spending has been helped by the rapid expansion of household credit, especially among low-income families. According to the National Statistical Survey's Household Socio-Economic Survey (SES), the debt-repayment-to-income ratio for households with monthly incomes lower than 10,000 baht increased from 45% 2009 to 52% in 2011. This ratio for the upper-income groups stayed roughly the same during the same period. This finding indicates a sizeable increase in debt among low-income households. With those being typically cash-constrained, the increasing availability of credit is likely to lift their spending significantly.
Nevertheless, if consumer spending is to continue to drive the economy, consumers must be in a sound financial position _ that is, they must not be overburdened with debt. The debt-repayment-to-income ratio for impoverished families suggests that poor families are buried under a huge pile of debt. Thus, these families are unlikely to be able to spend much more going forward.
In sum, the tax rebate from the expiring first-time car buyer programme and the second round of the minimum wage hike will provide an important support to private consumption. So the answer to our question is yes _ consumer spending will continue to drive the economy in 2013, but at a growth rate lower than in 2012.
SCB Economic Intelligence Centre expects real private consumption to grow around 4% in 2013, a little lower than its 2012 growth rate. Also, it is important to note that domestic demand in 2013 will be given a substantial lift by various public investment projects. Increased consumer spending, coupled with government investment, will be the key to economic growth in 2013.
Dr Sutapa Amornvivat is Chief Economist and Executive Vice President at Economic Intelligence Center, Siam Commercial Bank. She has international work experience at IMF, ING Group and Booz, Allen, Hamilton. She received a BA from Harvard and a PhD from MIT. Email: firstname.lastname@example.org.
EIC Online : www.scbeic.com
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Writer: Sutapa Amornvivat