We forecast Thailand's economy to post a modest recovery in 2021, as risks remain heavily tilted to the downside due to the Covid-19 pandemic. Challenges also remain around encouraging investment and offsetting lost income from the tourism sector.
The economy contracted 6.1% in 2020, according to preliminary estimates from the National Economic and Social Development Council, slightly less than our forecast for a 6.3% fall. Domestic lockdown measures in the second and fourth quarters took their toll, as did the collapse in global tourism and goods demand during the worldwide downturn.
While eased fiscal and monetary policies proved somewhat effective in supporting domestic demand, the impact from the loss of external demand proved too much. In 2021, we expect the external sector to show some recovery -- with tourism still lagging -- on the back of an upturn in the global trade cycle. We also believe fiscal and monetary policy will be adjusted to provide further support to households and small and medium-sized enterprises (SMEs).
While we expect the first quarter to reflect a continued slowing of the recovery, we anticipate the second half could be somewhat stronger as global trade accelerates. As such, we downgraded our real GDP growth forecast for 2021 from 3.9% to 3.3%.
In the fourth quarter of 2020, real GDP growth was 1.3% quarter-on-quarter, down from 6.2% in the third quarter, marking a significant slowdown in the recovery. The year-on-year contraction was 4.1%, an improvement from 6.4% in the prior quarter.
Both private and public consumption posted growth, at 0.9% and 1.9% year-on-year respectively. However, fixed capital investment and exports remained drags, with the former contracting 2.5% and the latter declining 21.4% year-on-year. Exports of services continued to be a major drag on growth, falling 74.8% in the fourth quarter.
Indeed, without recovery in the tourism sector, which contributes 22% to GDP, exports of services will continue to drag on headline growth through the first quarter and possibly later into 2021.
CONSUMPTION UPTICK
Through 2021, we expect private consumption and gross capital formation to post gradual rebounds as low base effects kick in and confidence recovers, on the back of policymakers' support and an improved external backdrop. We forecast private consumption to grow by 1% and gross capital formation by 1.3%.
Private consumption growth will find some support from low base effects, assuming no further Covid-related restrictions, and continued loose fiscal and monetary conditions. However, high household indebtedness -- at 72.8% of GDP as of the second quarter of 2020 -- and a weak outlook for employment will cap the strength of the recovery.
A subdued outlook for the tourism sector -- which accounts for around 20% of jobs -- and continued layoffs by manufacturers in January implies household confidence will take time to recover. Reflecting these challenges, consumer confidence dipped from 50.1 in December to 47.8 in January, in line with employment sentiment among businesses.
Similarly, gross capital formation will be tied to business confidence and the effectiveness of policymakers' efforts to extend credit to SMEs. Business confidence declined in January as the threat of a second Covid wave weighed on sentiment.
While this threat appears to have abated with domestic cases declining in early February, the fragility of business sentiment to the pandemic will cap investment activity. In particular, loose labour market conditions could result in businesses forgoing capital expenditure in favour of cheaper labour inputs.
As we have highlighted, credit to SMEs remained in a deep contraction as of the third quarter of 2020, down 28.3% from a year earlier. A rebound in credit growth to this segment could entail a stronger pick-up in investment than we are anticipating.
Government support will be a significant contributor to growth, at 1.5% in 2021. We forecast the fiscal deficit to remain wide through 2021, as the government provides additional stimulus packages to offset the lost income from tourism.
SCOPE FOR STIMULUS
We believe the government has scope to do more fiscal stimulus given a relatively low public debt-to-GDP ratio, low borrowing costs, a high private-sector savings rate and the Bank of Thailand's ability to bolster its asset purchase programme.
Net exports will provide some upside, rebounding from an estimated 5.4-percentage-point drag on headline growth in 2020 to a 2.2-point contribution in 2021. As noted, tourism weakness will stifle the overall export recovery, with little revival for tourism expected until the fourth quarter.
That said, there is scope for a rebound on the goods side, with an expected upturn in the global trade cycle through 2021.
We forecast exports to grow 7.5% in 2021. Imports will also post a modest rebound based on growth in the domestic economy and higher commodity prices. However, our downbeat outlook for capital expenditure and domestic demand means we are less expectant of a recovery in imports.
The pandemic remains the major downside risk. A resurgence in domestic cases given the likely slow roll-out of vaccinations through 2021 could hamper the domestic recovery, as well as any plans to reopen for tourism.
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.