Everybody has high hopes for the year 2021. Stock markets seem to think so. The Dow Jones Industrial average started the year at around the 29,000 mark and dropped by one-third to 20,000 when Covid-19 became a global threat in late March. Today, despite the second, third, and fourth rounds of outbreaks around the globe, Dow Jones is approaching the 30,000 mark.
It seems like stock markets do not care about the 1.5 million deaths from coronavirus and the daily infections of 650,000 cases while vaccines remain on the horizon. One cannot put all the blame on greed. Respectable organisations like the IMF and World Bank both project a strong economic comeback in the year 2021. All economic losses this year will be made up by robust world GDP growth of 5.2% next year, which will be the highest GDP growth rate the world has ever seen since 1976. Our Minister of Finance seems to agree with this trend as well. He believes that, unlike the financial crisis of 1997, the Thai economy will rebound quickly.
The world has good reason to be optimistic about the post-Covid economy because third-quarter economic data indicates a path towards strong economic recovery. US GDP grew by 33.1% (quarter-on-quarter, annualised) in the third quarter, beating the projected growth rate of 17% by a wide margin.
Japan's third-quarter GDP also grew 21.4% (quarter-on-quarter, annualised), almost making up for the GDP loss of 28.8% in the second quarter. Singapore is riding the same trend. Its third-quarter GDP expanded by 7.9% (quarter-on-quarter, not annualised) compared to a 13.2% contraction in the preceding quarter. Be prepared, Thailand's third-quarter GDP is likely to be better than anyone has expected. Unfortunately, the sharp economic rebound is a one-time thing and will not be repeated in the fourth quarter and beyond.
All economic good news ends in the third quarter. A strong economic rebound in the third quarter is the product of, firstly, pent-up demand from restrictions on economic activities in the second quarter and secondly, large financial stimulus packages. With cash in hand from the government's cash giveaway programmes and three months of restricted consumption, consumers were more than eager to spend in the third quarter. In Japan, third-quarter private consumption jumped 20.1%. Without mega cash hand-out programmes and already satisfied pent-up demand, it is most likely that consumption will drop again in the fourth quarter, bringing the entire economy down with it.
The downside of easing lockdowns on the economy is the re-emergence of the pandemic. Global daily infection cases more than tripled to 650,000 cases per day from less than 200,000 cases per day in the second quarter. This is not only a high price to pay, but it leads to re-lockdowns, which inevitably cause a global economic slowdown. Worst of all, there are no more cash hand-out programmes as all governments are totally broke after spending 10% of GDP on economic stimulus packages in the second quarter.
Do not be overjoyed that Thailand still has stimulus packages -- namely the half and half programme -- in the fourth quarter. The package has a small budget of 30 billion baht compared to the 600 billion baht of cash handout packages in the second quarter. Despite the media hype about the half and half programme, its small size (0.7% of quarterly GDP) will make no significant impact on the economy.
What about vaccines? Pfizer has already submitted its for approval from the US Food and Drug Administration and the EU, paving the way for public vaccinations next year. Other vaccine developers will soon follow suit. Even with the successful development of vaccines, mass vaccination is only likely to be completed by the end of 2021. High-priority people such as medical personnel and the elderly will be vaccinated in the first half of the year while the general public will have to wait until the second half. Do not forget that each person will need two shots for the vaccine to be effective. The first batch of people will get their first shot in June and the second in October. Therefore, one should not expect economic activities to resume at the pre-Covid level in the year 2021. With luck, 2022 will be a "normal" year.
That is exactly the problem. The waiting time.
Time is something an economy, particularly the Thai economy, cannot afford. Expenses occur every single day but businesses and consumers would have to wait, at least, one more year before their income "theoretically" returns to normal. This is not possible in the real world. A domino effect of business shutdowns and widespread loan defaults will be common in 2021, dimming the hopes of a full rebound in 2022. The Thai economy is especially at risk as our economy depends on foreign tourist income, which, according to the International Air Transport Association (Iata), even with successful distribution of vaccines in 2021, will not return to normality until 2024. Three years of waiting is very cruel for the Thai tourism industry.
As we all know, 12% of Thai GDP, about two trillion baht per year, depends on foreign tourists. Half of Thai tourism businesses will be gone before the "normal" travel year of 2024. The closure of tourism businesses also means 2.2 million workers will be out of jobs. Finding jobs for 2.2 million people will be the most challenging task facing the Thai economy.
While the tourism industry is waiting for the sunlight of 2024, Thai consumers are drowning in debts with less and less income to rely on. It is certain that Thai household debt to GDP will exceed 80% this year which would put Thailand in the top 10 among countries with the highest household debt to GDP. Following such high levels of debt, banks actually stopped extending new consumer loans since January 2020, even before the Covid-19 outbreak. According to my own calculations, 20% of domestic consumption is financed by borrowing. No loans means no consumption.
A situation like this happened in Japan in the year 2000 when household debt to GDP touched the 72% level and banks stopped issuing new consumer loans until the household debt to GDP ratio dropped to 52% in 2016. The result was the world's longest economic slowdown known as the "lost two decades" of the Japanese economy. I am curious to see how the Bank of Thailand will manage the zero-loan growth problem in Thailand.
This Christmas, ask Santa for a better economic situation by 2021. His reply will probably be a grim smile.