The first half of 2019 has already passed and it is a well-known fact that the Thai economy is not in good shape. GDP growth has plummeted from 3.7% in the last quarter of 2018 to 2.8% in the first quarter of this year. Although second-quarter GDP growth will be officially announced soon, raw economic data from April to June indicates a weaker second quarter, particularly in the areas of exports and tourism.
Good or bad, the first half of the year is in the past, and the future is the second half. What are the prospects for the Thai economy? The short answer is worse -- and likely to get much worse.
My column today will explain the key and growing problems challenging the economy in the second half of the year, which I call "the causes". Then, my next column on Aug 15 will explain the second part -- the expected economic outcome or "the results" -- to predict the likely state of the economy in the latter half of the year.
Before we gaze into the future, let's look at the past. I never start with the government's GDP figures to analyse the economy as I find official figures to be inconsistent with other sectors. I was taught at the International Monetary Fund (IMF) that GDP figures, which are technically called the "real sector", must be consistent with other economic sectors such as the monetary sector, the fiscal sector and the external sector.
Therefore, I devised a more accurate measurement of the economy which I term "adjusted GDP". And, on an adjusted GDP basis, GDP growth for the first quarter of this year is 0.3%, not 2.8% as compiled by the National Economic and Social Development Council (NESDC), which indicates that the Thai economy is far from being okay.
As a matter of fact, using adjusted GDP, the Thai economy has been in a steep decline since the third quarter of last year. The main cause is the negative growth in exports of goods and services. Mind you, exports of goods and services account for 77% of Thai GDP. Thus a 5% drop in exports will mathematically translate into a 3.8% contraction of the economy. In the first quarter, export growth was -4.9%, but GDP growth was +2.8%. Now you see why I have to adjust the official GDP figures in my analysis.
Unfortunately, the decline in exports is most likely to continue to hurt the Thai economy. More unfortunately, there are four more negative factors to challenge the economy in the second half of 2019.
The first of the four tough challenges is the weaker global economy. Please do not blame everything on the trade war between the US and China. In my view, the trade war is a "result", not a "cause". The real culprit is a decade of over-consumption and over-investment. It all started in 2008. To counter the effects of the Lehman Brothers crisis, central banks and governments poured incredible amounts of money into their economies.
Excessive money supply causes economic bubbles and, started by the US Fed in December 2015, bubbles are deflated before they burst. However, a slower economy means higher unemployment. President Trump did not want to see that. American jobs had to be taken back from China. The result is the notorious US-China trade war beginning in 2018. As the world economy continues to deflate, trade wars are likely to intensify. Sadly, a weaker global economy, more precisely the Chinese economy, means fewer exports and fewer tourists for Thailand.
The second challenge is a troubled domestic economic structure. The Thai economy is troubled on both the demand and supply sides. Domestic consumption is plagued with a high level of household debt. The Bank of Thailand estimates that by the end of this year the household debt/GDP ratio will reach 80%. Including curb-side lending, the ratio could be as high as 100% or more, which would put Thailand at the top of the global household debt/GDP list, and the highest in Asia. Naturally, the central bank has to step in to curb this lending, resulting in a marked slowdown in durable goods consumption. The trend will accelerate in the second half of this year as delinquent loans rise alongside a weakening economy.
On the production side, Thailand has lost about 20% of labour productivity over the past five years. The productivity loss is largely the result of a lack of investments to upgrade factories. Average capital investment growth stands at only 2.7% per year while minimum investment growth of 5% is required to maintain productivity. This severe loss of competitiveness is the true cause of the decline in Thai exports, not the slowdown in the global economy.
The slowdown in global economic growth from 3.9% in 2018 to 3.2% in 2019 (July 2019 IMF projection) did not cause the 4.9% contraction in Thai exports in the first quarter. According to an expert, the lack of private investment, particularly from Japan, is a direct result of Thailand not joining the Trans-Pacific Partnership. Without clear direction in international trade, Japanese manufacturers decided to drop Thailand from their global supply chain. The strong currency only makes a bad situation worse.
Evaporating purchasing power and a lack of international competitiveness are not the only domestic problems of the Thai economy. The replacement of wholesale/retail trade by e-commerce is another big blow to the economy. The Thai wholesale/retail trade sector generates 2.7 trillion baht in income annually (16.6% of GDP) and employs 6.5 million workers. Closure or downsizing of retail/wholesale shops means smaller GDP. I can guarantee that there will be a lot more closures and downsizing in the latter half of 2019.
The third challenge is the government. It is not only the external and internal economic conditions that are worrisome. The new government also has cause to be worried. Despite the life-threatening problems described above, none of these issues are mentioned in the government's manifesto presented to parliament last week. On the contrary, there are many misconceptions by the government such as household debt, which arise because of a lack of financial discipline, and Thai people, particularly the lower-income group, not paying enough taxes. Please note that Thai effective tax rates are the highest among Asean nations. Our effective tax rate is 17.6% compared to 14.6% in Singapore, 13.6% in Malaysia, and 11.5% in Indonesia. Furthermore, 36% of our total tax revenue comes from VAT while VAT accounts for only 13% of the total tax revenue of member countries of the Organisation for Economic Co-operation and Development (OECD). In rich countries, consumers share much less of the tax burden than the poor people of Thailand.
The fourth challenge is the drought situation. I am no expert on the issue, but I'm praying that the drought will not cause widespread damage to the economy.
Four serious challenges. What is to be expected for the rest of the year?
Chartchai Parasuk, PhD, is a freelance economist.