Thai economy needs new growth drivers
The state of the global economy today is disjointed and complicated. To understand this complexity, derived from many countervailing forces, one needs to differentiate the short-term outlook from the longer-term challenges.
In the short term, the global growth story is all about transition. Since the peak of the credit cycle in 2014, the global economy has entered into an important transition propelled by the forces of debt deleveraging, the slowdown in China, and the move toward normalisation of the US's monetary policy.
This transition is a positive development and should pave the way for stronger growth and recovery going forward as the global economy moves away from an unsustainable equilibrium of excessive debt and leverage to a new equilibrium of more balanced growth and less debt.
China's transition, for example, to a slower growth economic model is good for China and the world economy. A normalisation of US monetary policy is also long overdue as it would help reduce incentives for speculation with ultra-low interest rates and avoid a possible debt-driven boom and bust scenario further down the road.
However, this transition is far from complete; a firm recovery of the global economy has not materialised. The fragile recovery stems largely from unresolved structural problems linked to the global crisis of 2008, especially problems in the labour markets and banks in Europe, and uncertainties linked to grim faith in the strength of macroeconomic policy to lift growth.
The ongoing political turmoil and associated security concerns in many parts of the world have also weighed down confidence and economic activity.
Reflecting this, global economic recovery so far has been mild, depending greatly on central banks' liquidity injections and stimulus measures.
Meanwhile, the flood of liquidity has boosted global asset prices, in contrast with generally weak economic growth and fundamentals. Such divergence is not sustainable and eventually something will have to give.
The longer-term outlook for the global economy seems to be even more challenging.
Since the 2008 crisis, many factors have worked to reduce the global economy's long-term growth potential, including declining private investment, slowing productivity, and an ageing population. Drivers that had been instrumental in global growth in the past, particularly for emerging markets, have been adversely affected by the macroeconomic settings post-crisis.
Chief among these are sharp declines in global trade, loans and trade financing by global banks. These contractions make exports a less viable growth driver, especially for emerging markets.
At the same time, the advent of new technologies, some of which are disruptive, is reshaping the landscape of businesses worldwide in manufacturing, finance and services.
The global economy needs to embrace these new technologies and use them to raise productivity and generate growth in addition to more actively pursuing the structural reforms that have yet to be completed.
Looking at Thailand within this overall global context, recent data for the first half of this year is encouraging. We are seeing a firmer upturn in economic activities which is good news. GDP growth is estimated at 3.3% for the first half of this year compared to 2.9% in the second half of last year.
However, the ongoing growth momentum is driven largely by government spending and investment as well as income from tourism, while private investment, consumption and exports continue to stagnate.
Weaker private demand is linked largely to falling incomes, a high level of household debt, slower bank credit and the lingering effects of political uncertainty on confidence. Meanwhile, the export contraction reflects more structural problems like slowing global trade and declining competitiveness. These are urgent problems that need to be addressed.
Reflecting this, inflationary pressure in Thailand remains subdued while the massive current account surplus derives from import shrinkage. The data shows that about half of the current account surplus is absorbed by the rise in the country's international reserves while the rest has helped fund outbound investment by the private sector in the form of foreign direct and portfolio investments.
So, the Thai economy is in a state similar to most economies at this time. Growth is slightly improving but still depends on government stimulus and policy.
Despite very low interest rates and ample liquidity, the private sector is deleveraging rather than responding, while exports are no longer playing the role of the growth driver.
Hence, the Thai economic outlook in the short term will hinge largely on stimulus policies and the responses of the private sector to such policies. In the longer term, the country clearly needs new growth drivers to create new income sources and opportunities for the Thai people.
These requirements point to the importance of reform as a tool to address the legacy of structural inadequacies, build stronger institutions and pave the way for the development of new growth drivers by the private sector. These new growth drivers will need to be innovative, inclusive, competitive and rely mainly on the country's strength and values.
Bandid Nijathaworn, PhD, is President & CEO of the Thai Institute of Directors (IOD). This article is an abridged version of an address made at the Fitch Thailand 2016 Annual Conference Global Risks & Thailand's Economic Outlook in Bangkok on Sept 14, 2016.
Visiting Professor at Hitotsubashi University
Bandid Nijathaworn is president and CEO of the Thai Institute of Directors and visiting professor, Hitotsubashi University. This is an abridged version of an article featured in the book 'Bretton Woods, The Next 70 Years', published by the Reinventing Bretton Woods Committee, 2015.