ASP: Likelihood of deflation rising

ASP: Likelihood of deflation rising

Global equities continue sell-off

A mall sits empty in Bangkok. Consumer prices have fallen for two months, stirring deflation fears. (Photo by Varuth Hirunyatheb)
A mall sits empty in Bangkok. Consumer prices have fallen for two months, stirring deflation fears. (Photo by Varuth Hirunyatheb)

Thailand's economy is facing a greater risk of deflation after a two-month easing of headline inflation, with global stock markets experiencing another sell-off trend this month, says Asia Plus Securities (ASP).

Deflation is defined as a decline in the general prices of goods and services for six consecutive months.

This week it was reported that the consumer price index (CPI), a gauge of headline inflation, fell 2.99% year-on-year in April, the biggest decline in 10 years and nine months.

The reading marked the second straight month of decline after the CPI fell 0.54% year-on-year in March, the first contraction in 33 months.

Major contributions came from energy prices, which saw their biggest drop in 11 years and two months, and discount goods and services under the government's measures aimed at reducing the cost of living during the coronavirus crisis.

"There is a risk of [consumer prices] entering deflation if the inflation rate is reported in negative territory for three consecutive months," said ASP analyst Chanchai Pantathanakij.

Consumer prices in various categories saw a decline during the past two months, including oil, fresh food and transport, Mr Chanchai said.

The inflation forecast is also skewed downward as a result of an economic contraction and rising unemployment, he said.

Thailand experienced deflation in 2010 and 2015, with prices declining in real sectors such as aviation, property, public utilities and entertainment, according to ASP.

Deflation would also take a toll on industries with fixed-cost capital such as electronics, petroleum, petrochemicals and automotive, Mr Chanchai said.

"We recommend underweight investment, as this is not the right time to increase stakes," he said.

Thailand's stock market is rebalancing towards the sell-off trend seen among global bourses as concerns abound over the renewed Sino-US trade war, the second wave of the pandemic and a deteriorating global economic growth outlook, he said.

"Global investors are relocating money from risky assets to safe-haven ones," Mr Chanchai said.

Visit Ongpipattanakul, managing director of Trinity Securities, said concerns about deflation are overblown.

"The negative inflation is caused by lower output and the lockdown measures to curb the outbreak," Mr Visit said. "This is still too early to conclude [whether the economy will enter deflation]. We are monitoring this, but continuous negative consumer prices for a year will effectively put the economy into a state of deflation."

He said the economic sentiment during this crisis is similar to the mood during the Great Depression of the 1930s, but one key difference is that central banks are coordinating and injecting massive liquidity into their financial systems to shore up momentum.


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