Thai manufacturing grew for the fifth consecutive month in May despite a fall in demand, with safety stock building one of the key factors driving the expansion.
The S&P Global Thailand Purchasing Managers Index (PMI) measured 51.9 in May, unchanged from April. The PMI figure represents manufacturing performance, and a number above 50 indicates expansion. The figure is calculated using Thai purchasing managers' responses to questions about their new orders, output, employment, suppliers' delivery times, and stocks of purchases.
But the increase did not reflect an improvement in demand as overall new orders, including new business from abroad, were depressed because of higher product costs.
Supply constraints also persisted with longer lead times and record price pressures, contributing to higher input purchases.
"Price pressures worsened in May, and alongside the lengthening of lead times highlighted the deterioration of supply chain performance. This likewise represented a negative development for Thailand's manufacturing sector outlook," said Jingyi Pan, economics associate director at S&P Global Market Intelligence.
She added that May's PMI Suppliers' Delivery Times index indicated lead times were lengthening at the fastest rate since January.
But despite a volatile supply situation across the region, where shortages and fluctuating prices have caused this safety stock building behaviour, Thai purchasing managers anticipated strong output growth and the importance of safety stock building. As a result, Ms Pan said the managers increased their quantity and stock of purchases in May for current production needs.
Passing the cost to clients
Speaking about higher production costs, Poon Panichpibool, markets strategist at Krungthai Bank, said that the cost-push shock to inflation is becoming more important.
"As the latest PMI showed, there is increasing price pressure from higher input costs and supply chain disruption," he said. "Some manufacturers might still pass on their costs to their customers. Hence, we could see more of an impact from higher input costs to final goods prices, which could raise overall inflation."
The cost-push shock to inflation phenomenon happens when the product price increase stems from the rising cost of wages and raw materials.
"If we see more companies pass on their costs to final goods, it could lead to a broad-based rise in prices, which should attract attention from the Bank of Thailand so we could expect to see the central bank provide more comments on that aspect," Mr Poon added.
The Bank of Thailand recently said it may revise its inflation forecast at its next monetary policy committee on June 8, given the state of the economy.
Meanwhile, S&P's Ms Pan said manufacturers reported in May that they had shared their higher cost burdens, stemming from rising raw material, shipping and transportation expenses, with clients.
Nonetheless, she said that the easing of Covid-19 disruptions in mainland China should bode well for Thailand's manufacturing production activities in the coming months. However, she added that companies must again take care to manage costs, supply chains and labour issues.
As for the region, Thailand's PMI May figure of 51.9 is in the same positive territory as Vietnam, though others are still struggling to recover, including Malaysia, the Philippines and Australia.