The Thailand Development Research Institute (TDRI) has warned that excessive government stimulus beyond the GDP potential could trigger a wage-price spiral, which may lead to a future economic crisis.
Nonarit Bisonyabut, a research fellow at the TDRI, said from an economic standpoint, it is crucial for growth to align with GDP potential because if it expands beyond its potential, inflation will rise.
The wage-price spiral is a macroeconomic theory that explains the relationship between rising wages and rising prices, which can lead to inflation. It describes a cycle in which increased wages lead to higher demand and as a consequence, rising prices.
The increase in prices leads to demand for even higher wages, contributing to a continuous loop of inflation.
"As for Thailand's economic potential, the Bank of Thailand estimates the country's GDP potential at 3%, while SCB places it at 2.7%. An appropriate GDP potential range could be 2.7-3%. If growth is pushed beyond this level, it risks causing inflation and placing an unreasonable fiscal burden on the government," said Mr Nonarit.
"Stimulating economic growth beyond its potential by injecting money into the economy to encourage consumer spending does not necessarily lead to increased production. For example, if the government distributes 100 billion baht to the public, the manufacturing sector is unlikely to produce an equivalent amount of goods. Instead, the sector may add products to their stocks to sell to the public, or raise prices."
He said some stimulus can be useful if economic growth is expected to be below its potential.
"I estimate Thai economic growth of 2.6-2.7% this year without any stimulus, meaning growth is already near its potential. This reduces the need for additional state stimulus measures," said Mr Nonarit.
"If the government wants to address economic issues, it should focus on targeted interventions, such as assisting the poor or supporting small businesses."
He said overstimulating the economy can lead to a wage-price spiral.
Whenever inflation rises rapidly, workers can no longer sustain themselves with the same wages due to higher living costs.
This means workers will demand higher wages, increasing business costs, which in turn causes product prices to rise, leading to even higher inflation, said Mr Nonarit.
"This creates a death loop that accelerates over time. For this reason, the Bank of Thailand needs to keep inflation low," he said.
"Although the current level of overall inflation is still less than the central bank's target range, we don't know what level of inflation will pose a problem for the economy. For example, if we stimulate the economy to grow by 3.5% for the next two years, can the economy handle it? The risk is if we do too much and upset the balance, it can be difficult to correct.
"Economists fear this because economic crises often arise from small problems that we perceive as insignificant. Once these problems reach a certain point, they become irreversible, as happened in Argentina, where a crisis started from small issues."
Mr Nonarit said wages and product prices, once raised, are hard to reduce, especially minimum wages.
"Once they go up, it's very difficult to bring them down," he said.
For example, the price of a one-dish meal such as khao mun gai has increased to at least 50 baht per plate. Even though inflation has slowed, vendors still sell at the same price, said Mr Nonarit.
"While the government claims inflation is not yet a problem for the country, has it looked at the prices of essential goods that people buy on a daily basis, particularly the price of one-dish meals?" he said.
"These meals have risen from 50 baht to sometimes 60 or 70 baht now."