After a year of diminished expectations, one might wonder whether the Thai economy this year will expand at a lower rate, the same or a higher rate than last year. But before we look into the future, it is worth examining what happened in 2019.
Last year was certainly a major disappointment in terms of GDP growth. While it was expected that a slowdown in the global economy would bite into Thailand's performance, at the beginning of the year many still hoped that a third consecutive year of 4% expansion could be achieved.
As the year progressed, however, it became apparent that the Thai economy would slow down much more. Indeed, the Bank of Thailand revised down its 2019 GDP growth forecast every quarter: from 4.0% in December 2018 to 2.5% in December 2019. Those forecasts were already less optimistic than those of many public and private bodies at the beginning of the year.
With the benefit of hindsight, there are two major factors that drove this underperformance. The first was the sharp slowdown in global trade that surprised most observers. This was partly due to the Sino-US trade conflict, but also because the whole world was so pumped by the synchronised global expansion of the previous year. That had led to an excess accumulation of inventories and left most countries unprepared for a trade uncertainty shock.
The slowdown in global trade hit the Thai export sector hard. When the Bank of Thailand forecast 4.0% economic growth, we expected merchandise exports to expand by 3.8%, about half of the 7.5% recorded in 2018. The most recent 2.5% GDP forecast came with an expectation of a 3.3% contraction in merchandise exports. With the exception of the US, exports to all major markets were expected to end in the red.
The second major factor was the delay in public investment, most notably the fiscal 2020 budget and spending by state enterprises, as well as the Eastern Economic Corridor (EEC) projects. At the beginning of 2019, public investment and EEC projects were expected to partially shield the economy from the impact of weakening exports. Had public investment and EEC projects proceeded according to plans, overall GDP growth of about 3% in 2019 would still have been achievable.
Given the two factors, it is difficult to imagine that a different administration could do much better to steer the economy. Export woe was almost universal, with many countries experiencing a deeper export contraction than Thailand did. There was little that a small, open economy like Thailand could do to stay afloat.
Moreover, with a different administration, it is conceivable that both public investment and EEC projects would have been delayed even further. Nevertheless, proclaiming that the economy remains strong undermines the credibility of the government. Let's face it, growth in the mid-two-percent range is far from strong. A better communication strategy perhaps would be to let go of denial and prepare everybody to cope with an extended period of slowdown.
The good news is that most forecasters, including the Bank of Thailand, expect the economy to fare better this year. This is because the two major factors at play last year are likely to have less impact.
The trade conflict between the US and China has eased. While tension is expected to remain, further escalation is unlikely in light of the presidential election in November. Additionally, there are increasing signs of a recovery in the global electronics industry cycle, which should benefit a number of Asian economies, including Thailand. Finally, global trade sentiment is further supported by positive developments on Brexit and the pricing out of a US recession risk.
On the domestic front, the base case is for the 2020 budget to be passed in February. At the same time, the government is keen on accelerating investment by state enterprises and progress of the EEC. All of these should fill the investment void that was evident last year.
The turnaround is, however, likely to be subpar and not felt by most until the second half of the year. This is because the new normal for global trade reflects structural conflict between the US and China, not to mention that it will take time for the export recovery to filter through to all economies.
Moreover, the slowdown last year has exposed several weaknesses of the Thai economy, most notably business competitiveness, household indebtedness and the labour market, all of which are structural in nature.
Amid the expected sluggish turnaround, it is important to be patient and not to despair. A case in point is the decision by S&P Global Ratings to upgrade the country's sovereign credit rating outlook to positive from stable despite forecasting GDP growth of 2.8% this year (incidentally, the same as the Bank of Thailand's latest forecast) and a mere 3.0% in 2021.
Of course, World War III would change everything. Let's hope the world can avoid it!
Don Nakornthab is senior director of the Economic and Policy Department at the Bank of Thailand. The views expressed here are the author's own.