Thailand's economy is headed for new recession

Thailand's economy is headed for new recession

The key difference between a politician and an economist is that a politician establishes a goal, while an economist analyses the means to achieve that goal. For politicians, the ultimate goal is to control a society by becoming the government, and the means to achieve such goals are through laws and regulations.

Those who can write the laws in their own favour normally become winners. And that is likely also the case in present day Thailand. However, the control never lasts for long. History has taught us that, and this time around, history will not be wrong.

For economists, the ultimate goal is to maximise consumption under budgetary constraints. In economic theory, it is called the "Pareto optimality" of the utility function, and the means are through macro- and microeconomic management. So those who can fulfil the consumption demands of the people normally become the winners.

Unfortunately, this is not the current situation in Thailand. As a result, the rising economic dissatisfaction will change the face of Thai politics regardless of who writes the laws.

Before I explain why the current economic conditions are not satisfactory, and more importantly, why future economic conditions will be even more unsatisfactory, I would like to explain the the coexistence of politics and economics.

Typically, politics come first and someone will get to govern a society or a country,

Through a political post, a person or group governs a society or country. However, the economic outcomes determine the sustainability of that political regime. This is a fact confirmed by history.

I will use China as an example. The change from the Qing Dynasty ruling to the Communist regime is purely economically driven. Wealth was so concentrated and ordinary people were starving.

The Communist regime set out to change that and the people welcomed the change. After a long period of communist rule, the Chinese people were starving again.

This time it was because the "communal" system created great inefficiencies in the production system. Everyone was working for the state, so no one had an incentive to work hard.

For the Communist regime to continue, it needed to respond to harsh economic situations. The hero was Deng Xiaoping. The change was simple, but totally against Mao's core ideology.

From working purely for the state, farmers got to keep 70% of their production and the state would take 30%. Simply put, it was a capitalist system with 30% taxation. Production then increased tenfold.

After that, Deng opened China to the world. The rest is history.

The point of the Chinese story is that people are willing to accept the current political regime -- in whatever form -- as long as they are economically satisfied. All Chinese citizens are well aware that they are still living under the Communist regime while the rest of the world has turned democratic. Oppression is the norm.

The government has firm control of the economy and always has the last say. But do they care? Not really. Because they are economically happy. (That won't last for long, however, as the Chinese economy is quickly deteriorating.)

Now, I'll get back to the economic issues of Thailand. General critics view macroeconomic situations as not being in line with microeconomic realities. The situation is playfully termed "wealth concentrates, poverty disperses". I do not fully agree with such observations. The math does not add up.

As a matter of fact, once you take the GDP figures away, macroeconomic indicators and the microeconomic situation tell the same story; That story is that the Thai economy is weak and declining by the day. The whole story can be boiled down to two issues -- internal and external.

First, Thailand has weak internal "real" demand as Thai consumers never have enough money to consume. They thrive on borrowing. Over the past 10 years, Thai consumers have borrowed over 7 trillion baht to consume, which made the debt-to-GDP ratio jump from 60% to 80%.

By the way, these figures exclude curbside lending. When the loans start to run out, domestic consumption naturally becomes weaker.

Second, Thai manufacturers depend heavily on external demand. External demand was strong until the first half of 2018 as the whole world was quickly recovering from the Lehman Brothers Crisis.

Now, the whole world is drowning in household debt, like Thailand. Therefore, the global economy is slowing.

The slowing world demand severely impacts Thai exports. The figures are striking. In the first half of 2018, Thai exports rose 10.9% but the growth rate plummeted to 1.6% in the second half. The export growth for the first two months of this year was recorded at negative 3%.

The story is clear and the future is bleak. We are witnessing a marked slowdown in consumption of durable goods in the first two months of the year (most recent data available).

The growth rate of durable goods consumption dropped from a double-digit level in 2018 to about 5.5% during the said period.

Why? Credit limits have been reached and credit risks are too high. The external demand situation has already been explained. With weakening domestic and softening world demand, the Thai economy is heading towards a one-way street called "recession".

People have high hopes for the new government. The campaigns promise prosperity, higher wages and higher crop prices. The new government will be under tremendous pressure to quickly revitalise the economy.

Sadly, the fact is likely to be the opposite and political change will be demanded.

Economically, I do not see how the new government can revitalise the economy as their economic management is traditional. So far, fiscal policy has been ineffective. More importantly, their tools are rather limited.

My advice to the regime: Stop playing politics, play economics.


Chartchai Parasuk, Ph.D., is a freelance economist.

Chartchai Parasuk

Freelance economist

Chartchai Parasuk, PhD, is a freelance economist.


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