Is stagflation looming?

Is stagflation looming?

A variety of domestic and global developments bode ill for the Thai economy

A food vendor sits idly as he waits for customers in the Yaowarat area of Bangkok. Arnun Chonmahatrakool
A food vendor sits idly as he waits for customers in the Yaowarat area of Bangkok. Arnun Chonmahatrakool

With Thailand's inflation galloping, unemployment relatively high and the outlook for economic growth dimmed by another outbreak of Covid-19, economists and analysts are increasingly warning of a possible bout of stagflation.

Stagflation is a combination of stagnation and inflation. It describes an economic condition characterised by slow growth and high unemployment (economic stagnation) mixed with rising prices (inflation).

Stagflation is mostly associated with the 1970s, during which many developed economies experienced rapid inflation and high unemployment as a result of the oil crisis.

Conceptually stagflation is a contradiction as slow economic growth can likely lead to an increase in unemployment, but should not result in rising prices.

The latest inflation data on March 4 showed headline inflation, gauged by the consumer price index (CPI), surged 5.28% year-on-year in February.

It was the sixth straight month of year-on-year increases, which were recorded at 3.23% in January of this year, 2.17% in December, 2.71% in November, 2.38% in October, and 1.68% in September, following a 0.02% decrease in August 2021.

Average two-month inflation (January-February 2022) was 4.25% from the same period last year.

Core CPI, which excludes raw food and energy prices, rose 1.8% year-on-year in February, accelerating from 0.52% in January, and was up 1.2% month-on-month from January.

For the first two months this year, core inflation rose 1.16% from the same period last year.

The Commerce Ministry expects headline inflation in March to stay at a high level, driven by a rise in energy prices.

The ministry said inflation this year is likely to be volatile and the projection will be revised sometime this month.


Thanavath Phonvichai, president of the University of the Thai Chamber of Commerce, warned Thailand risks entering technical stagflation this year, driven by higher production costs affected by rising global oil prices.

The Thai economy is highly likely to grow at a rate of 2-3% this year, with inflation staying at 5% if the Russia-Ukraine conflict is prolonged throughout this year, according to Mr Thanavath.

"Inflation has become one of the biggest economic worries now that oil prices are likely to increase over the next three months to an average of US$100-120 per barrel," he said.

"With core inflation rising by 1.8% in February, the highest in seven years, local manufacturers are highly unlikely to maintain their prices as requested by the government. They are expected to begin to gradually adjust the prices and push the burden on to consumers."

Nipon Puapongsakorn, a distinguished fellow at Thailand Development Research Institute, agreed with this prediction. He said the possibility of Thailand experiencing stagflation is viable and he urged the government to produce a clear and trustworthy long-term economic restructuring plan to build confidence among private businesses both domestically and abroad.

Mr Nipon said Thailand still has to rely on foreign investment.

"All we have now is short-term stimulus plans, such as cash handouts," he said.

"It is important to ramp up decentralisation and local development. We have yet to fully utilise the potential of our provinces, focusing instead largely on Bangkok."

KKP Research under Kiatnakin Phatra Securities predicted in its latest research paper the escalating Russia-Ukraine conflict is the key risk factor that may adversely affect the global and Thai economies, possibly causing local stagflation.

According to KKP Research, the protracted Russia-Ukraine war could deliver a knock-on effect to overall exports, particularly for those bound for Europe, which account for 10% of exports, bringing about a sharp rise in the inflation rate. The war could also drive up crude oil prices and lower the number of Russian tourist arrivals to Thailand this year, according to the research.

Such an outlook would make it challenging for Thai monetary policy to handle a weak domestic economy, inflation, financial stability and foreign exchange, the research house said.


The Russia-Ukraine war is driving up global oil prices, increasing the risk of stagflation as uncertainty begins to cause Thai manufacturers to slow production, said the Federation of Thai Industries (FTI).

Kriengkrai Thiennukul, vice-chairman of the FTI, said many companies have begun to delay receiving new purchase orders overseas because of growing worries over higher prices of crude oil and raw materials.

Most manufacturers only produce goods based on old purchase orders, he said.

If the war escalates, the global economy, which is struggling to recover from the impact of Covid-19, will eventually bear a heavy brunt, said Mr Kriengkrai.

"The global economy may be heading towards stagflation, with higher inflation and unemployment rates putting more pressure on economies, not to mention soaring global oil prices," he said.

High energy prices are worrying transport operators and manufacturers who use oil in their production processes.

According to a survey of 150 FTI executives released in early February, 40% of respondents said they believe the business sector can maintain product prices without adjustment for only a short period.

Their views were gathered before the war erupted in Ukraine.

Mr Kriengkrai said last week manufacturers can maintain their goods prices for another 3-6 months given the Russia-Ukraine war, but only if the government continues to cap diesel prices at below 30 baht a litre.

Economists and the FTI first warned against higher inflation rates in January, following a sharp rise in pork prices because of a large decrease in the pig supply. African swine fever was cited as the cause of the supply shock.

Anusorn Thammajai, former dean of Rangsit University's Faculty of Economics, said back in January that Thailand, which is still struggling to recover from the downturn caused by the pandemic, may experience stagflation if inflation soars in March, according to media reports.

Drought may affect farming, which can lead to lower crop yields, he said.

The war will be a catalyst for stagflation, driving up prices of energy, some raw materials, logistics and food, said Mr Kriengkrai.

"Thailand faced stagflation in the 1980s, but there was no crisis then such as the Russia-Ukraine war. If stagflation reemerges, it's hard to say which event will be more serious," he said.


Sanan Angubolkul, chairman of the Thai Chamber of Commerce, said given the higher inflation rate, elevated jobless rate and slow economic growth, the prospect of Thailand entering stagflation is accelerating.

Thailand's inflation is likely to continue rising in coming months, driven by a sharp surge in oil prices because of the Russia-Ukraine conflict, said Mr Sanan.

"Thailand's rising inflation stems largely from the cost-push factor, which may not be a temporary problem anymore because of the Russia-Ukraine crisis," he said.

"The conflict may last for a long time and adversely affect world trade because Russia and Ukraine are important global commodity producers. If commodity products are in shortage, it will inevitably affect Thai manufacturers' production costs."

Mr Sanan said the government's price-fixing measure -- asking manufacturers and traders to help cap retail prices to alleviate consumers' hardships -- may end because of continuously rising energy and production costs. He predicted a shortage for certain products soon, such as chemical fertiliser.

If fertiliser prices become more expensive, farmers will use less of it, decreasing their productivity and income, said Mr Sanan.

The government should monitor the prices of goods and the cost of living, as well as prevent hoarding and profiteering by merchants, he said.

More assistance measures are needed to relieve the impact of high energy prices on people and entrepreneurs, said Mr Sanan.


Ronnarong Phoolpipat, director-general of the Trade Policy and Strategy Office, said despite a sharp rise in inflation, Thailand is unlikely to enter stagflation this year because the economy should improve and Covid-19 outbreaks are expected to ease in April and May.

The Russia-Ukraine conflict is also expected to be settled by negotiations, he said.

"Despite the conflict escalating, which triggered a rise in global oil prices, natural gas and commodities, we expect Thailand will brave this difficult period. The country's reopening to vaccinated visitors and the restoration of full diplomatic relations with Saudi Arabia for first time in three decades are expected to increase the tally of foreign tourists and lower the unemployment rate," said Mr Ronnarong.

He said the labour situation began to recover from the impact of Covid-19, with the unemployment rate dipping to 1.64% in the fourth quarter of 2021, representing 632,000 people, from 2.25% or 871,000 people in the previous quarter.

According to the National Economic and Social Development Council's (NESDC) latest report, in the fourth quarter of 2021 the country had 38.6 million people in the working age population, down 1.2% from 39.1 million in the same quarter of 2020. Of the total, 37.9 million people were employed, down 1% from 38.3 million in the same quarter the previous year.

For 2021, the unemployment rate increased to 1.93%, representing 748,000 persons, from 1.69% or 651,000 persons in 2020 as a result of the cumulative effects of the pandemic, according to the NESDC.

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