Light at the end of the tunnel could be a train

Light at the end of the tunnel could be a train

After nearly a year of unexpected global economic and investment derailment, we are beginning to see a glimpse of hope from a new and stable US president and the approaching availability of one or more vaccines that will put an end to the pandemic.

This has led to euphoria in the investment world -- global stock indices are at record highs while US long-term bond yields have risen; nevertheless, we are less sanguine.

In terms of the global economy, we believe that it will recover gradually if vaccines are approved. But confidence will not immediately return, since vaccines need to be approved, manufactured and distributed -- all of which are complicated and take time. This means the global service sector will continue to underperform and may pull economic growth below its potential until vaccines are widely distributed, possibly as late as 2022.

In terms of global politics, partisan conflict in the United States will not go away even with a new president. Joe Biden's administration may be hampered by a divided Congress with both parties having little in common, though some initial success may be seen since Mr Biden may start off with low-hanging-fruit issues such as Covid control, economic stimulus measures, and rejoining the Paris climate accord.

In Europe, meanwhile, we believe that the €750 billion worth of EU-wide fiscal stimulus may not be disbursed until the second half of 2021, slowing the recovery there.

In China, the Communist Party's latest five-year plan that focuses on domestic consumption and import-substitution production based on a "dual circulation" philosophy will help its economy continue to expand. Moreover, China's participation in the Regional Comprehensive Economic Partnership (RCEP) -- the free trade agreement that also includes Asean, Japan, South Korea, Australia and New Zealand -- will allows China to spread even more economic influence in Asia, and could lead to a new round of the "cold war" between the two largest economies.

In terms of global economic policy, we believe that monetary policy will continue to be accommodative compared to rather constrained fiscal policy, in light of three factors:

  • The US Federal Reserve has changed its inflation targeting goal, implying an overshoot.
  • Fiscal policy is as yet not fully effective given public debt limitations, and this is forcing monetary policy to play the lead role.
  • The Fed's easing bias will lead to a weak dollar, which will lead other central banks to carry out further relaxation to match the US (otherwise their currencies may be stronger than desired).

In terms of Thai economy, we believe the recovery will be slow, with each business sector having different recovery characteristics. In short, expect a K-shaped recovery with some sectors on an uptrend and others on a downtrend. We believe the Thai economic recovery will differ in three points:

  • External vs the domestic economy: with the effect of Covid-19 persisting longer than anticipated, external sectors such as tourism and exports will still be affected, while domestic segments such as private consumption will gradually recover, partly due to government measures to stimulate consumption.
  • Manufacturing vs services: The service sector will remain under pressure from the lack of tourism and risk-averse consumers, causing it to shrink or grow at a low level, while the manufacturing sector, especially agriculture, will begin to recover faster. This is partly due to rising farm incomes as the impact of La Nina improves output.
  • Monetary vs fiscal policy: The government will rely more on the fiscal sector to stimulate the economy, especially measures to stimulate consumption, such as the Shop and Payback tax-rebate scheme, the co-payment scheme and the additional living allowance for state welfare cardholders. On the other hand, monetary policy will not be as accommodative since the Bank of Thailand is concerned about the side effects of low interest rates.

Given this backdrop, our 2021 economic theme is 4-3-2-1, with 4% consumption growth (especially non-durables), 3% GDP growth, 2% growth in private investment and real exports of goods and services, and 1% as headline inflation, with the risk tilted towards the downside.

In short, 2021 growth will be soft, craggy and bumpy and will depend largely on government stimulus, with headwinds from both international and domestic factors.

Considering the landscape of the global and Thai economies in the near future, it could be said that it is not very conducive to investing. Therefore, investors should continue to be extremely cautious.

The light at the end of the tunnel may be coming from a train. Investors, beware.


Piyasak Manason is senior vice-president and head of the wealth research department at SCB Securities, email piyasak.manason@scb.co.th

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