Modest rebound ahead, with 3.9% growth in 2021

Modest rebound ahead, with 3.9% growth in 2021

Thai economy showing faint signs of life but revival of tourism will remain the key.

Thailand's economy is set for a modest recovery over the coming years from its recession in 2020. The economy has struggled amid the Covid-19 pandemic as its high reliance on external demand -- particularly tourism and travel -- has left it particularly vulnerable to a global pandemic.

Despite Thai authorities' relative success in containing domestic outbreaks of Covid-19, the economy fell into a technical recession in the first half, and the pandemic has resulted in the economy's deepest slump since the Asian financial crisis.

We expect the recovery to be gradual, given a delayed resumption of global tourism and travel and the weakening of domestic private-sector balance sheets. That said, we have revised our forecasts up slightly; we expect the economy to contract 6.3% in 2020, revised up from 6.6%, before rebounding more strongly to 3.9% year-on-year growth in 2021, revised up from 3.8%.

In the third quarter of 2020, the economy grew 6.5% quarter-on-quarter, slowing the year-on-year contraction from 12.1% in the second quarter to 6.4%. That compared with Bloomberg consensus expectations for a 3.9% quarter-on-quarter rebound and an 8.8% year-on-year contraction. Domestic activity proved a key driver, with public consumption and investment expanding 3.4% on the quarter and 18.5% from a year earlier. Private consumption improved from a fall of 6.8% year-on-year in the second quarter to 0.6% in the third quarter.

However, the external backdrop remained weak, dragged down by tourism. Exports of goods and services fell 23.5% year-on-year, only slightly improved from a 27.8% contraction in the second quarter. A 20.3% slump in imports eased some of the drag from net exports, but the drop in tourism and trade proved a major headwind. While we expect restrictions on activity to continue gradually easing in the fourth quarter, we believe the positive effect from lifting lockdown restrictions in the third quarter will fade.


Household consumption accounts for 50.1% of GDP and a potential stalling of the recovery in retail activity reflects weak consumer confidence and labour market conditions. In addition, social unrest from continued protests will likely disrupt activity and could affect near-term private investment decisions. We forecast private consumption and gross fixed capital formation to contract by 1.3% and 4.6% respectively in 2020, shaving 0.7 and 1.1 percentage points off headline growth.

On the manufacturing side, the October Purchasing Managers' Index (PMI) provided a mixed outlook. The PMI rose from 49.9 to 50.8 in September as output expanded for the first time since December 2019 and new orders rose at the fastest pace in over a year. However, sentiment remained subdued and employment conditions continued to deteriorate, amid a soft external demand backdrop.

Mirroring this, the Bank of Thailand Business Sentiment Index showed a decline from 51.3 in September to 45.9 in October, its first decline since April. With a mixed external backdrop as some economies recover or emerge from lockdowns, while others enter new lockdowns in the fourth quarter of 2020, we expect the external backdrop to provide a limited upside.

The recovery will prove more tick-shaped than V-shaped on the back of an uneven rebound in external demand and domestic activity due to the pandemic.

The country's reliance on tourism and travel -- which accounts for around 20% of economic activity and one in five jobs -- will prove a major drag on activity.

While a potential vaccine could be rolled out in 2021, we expect distribution to be lagged to emerging markets and this could result in export growth of 9% in 2021, from a decline of 19.7% in 2020.

Indeed, manufacturer confidence for the year ahead remains subdued given uncertainties about external demand. We expect this to delay decisions around hiring and investment, capping the recovery in domestic activity.

Domestic activity will face a challenging recovery due to the shock to household incomes and underutilisation of capacity, which will weigh on both consumption and investment decisions.

We forecast private consumption to grow by 1.2% in 2021, from a fall of 1.3% in 2020.

The consumer confidence index in October stood at 50.2, down from 70.2 a year earlier. As noted, tourism is a key employer and delays in the sector's recovery will drag on household income. Moreover, the manufacturing sector was continuing to shed jobs as of October. Thus, the labour market outlook remains weak heading into 2021. Higher unemployment will feed through into downward pressure on wages.

Another structural consideration is high levels of indebtedness among lower-income households. Household debt-to-GDP stood at 69.5% in the first quarter of 2020, above the emerging market aggregate of 42.2%. We expect households to boost savings and deleverage given low confidence levels, contributing to the modest pace of recovery.


On the investment side, we anticipate private activity to continue to be subdued, but public activity to provide support through the year. We forecast gross fixed capital formation to rebound by 4.5% in 2021, led by public investment.

We expect the government's fiscal deficit to remain wider for longer, with greater infrastructure expenditure a key component of the wider deficits.

In contrast, private investment will lag as spare capacity and the availability of labour reduces the need for capital expenditure. Capacity utilisation stood at 63.1% in September, down only slightly from 63.6% a year earlier. Nevertheless, the utilisation rate remains low and we believe Thai firms will continue to favour investment abroad, given the headwinds around political uncertainty and the tourism sector.

That said, we believe Thailand could benefit from the relocation of supply chains from China, and this could see some upside from foreign investment in 2021. As such, net exports will contribute 1.5 percentage points to headline growth in 2021.

Risks to the outlook include a domestic outbreak of Covid-19 that forces a reinstatement of lockdown measures, particularly as Thailand gradually reopens for international travel. Moreover, political unrest could weigh more aggressively on investment decisions if it emulates the levels of disruption seen during the 2014 protests.

This commentary by Fitch Solutions is not a comment on Fitch Ratings' credit ratings. Fitch Ratings analysts do not share data or information with Fitch Solutions Macro Research.

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