Stark reality behind economic figures
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Stark reality behind economic figures


A tourist poses at a temple in Bangkok on April 28. Current growth in the service sector, largely due to foreign tourist spending, is helping to keep the economy afloat. (Photo: Pattarapong Chatpattarasill)
A tourist poses at a temple in Bangkok on April 28. Current growth in the service sector, largely due to foreign tourist spending, is helping to keep the economy afloat. (Photo: Pattarapong Chatpattarasill)

At the time of writing this, the official Q1 GDP has not been announced by the National Economic and Social Development Council (NESDC). I expect the growth figure will be around 1.2%. My own estimation, using the Output Approach and actual sectoral production index, gives a growth figure of 0.98%. Detailed data are in the below table.

Readers might raise an eyebrow as to why I said NESDC's figure is likely 1.2% while my own estimation is 0.98%. The answer is this is Thailand, and a growth figure below 1.0% is not politically acceptable.

The GDP estimation of 0.98% is by no means pessimistic, but it is technically accurate. I test this method against actual 2023 GDP growth. The NESDC's growth figure is 1.90%, and this "output" method of estimation yields the result of 1.898%. If NESDC decides to announce Q1/2024 growth significantly higher than 1.2%, the agency will have a lot to explain to the public.

Low GDP growth for Q1/2024 is a result of contractions in output of both the agricultural and manufacturing sectors. Relatively high growth from the service sector, largely owing to foreign tourist spending, is saving the economy. Without a high level of service sector activities, Q1/2024 GDP growth would be in negative territory.

Weak Q1 growth figures mean that 2.4%-2.8% growth projections for 2024 by all research houses are no longer realistic. It is likely the Q2 growth figure is lower than Q1 due to extreme heat and worsening NPLs. Thus, I remain firm in my original projection of -1.5% to 1.5% growth for 2024, with the base case of 0.0%.

To me, the stories behind these numbers are more interesting than the numbers themselves. There are four stories that can be derived from the weak Q1 data. First, consumption is losing steam (fast). Second, the financial sector is dying. Third, the manufacturing sector is losing competitiveness. Fourth, foreign tourists are spending much less.

The first story about consumption is the most important one. The Thai economy has been relying on private consumption to support growth for two decades. The reason why the economy is persistently weaker than our Asean peers is Thailand is a consumption-led economy, not a production-led economy. Two decades ago, household debt to GDP was at the appropriate level of 42.2%. Thai household debt now ranks in the top 10 of the world with 91.3% of GDP. The ratio over 60% of GDP is considered unsustainable for developing economies.

Without a private consumption push, GDP growth rates for 2022 and 2023 would be 0.8% and -0.5%, respectively. The core of the Thai economy is weak. So, when consumption starts to wind down, the economy shows its weakness like in Q1/2024. The causes of the winding down are not difficult to guess. Household debts hit the limit, and NPL levels threaten the banking sector's stability.

Consumption that required financing contracted sharply in Q1/2024. Semi-durable goods consumption dropped 1.9%, and, hold your breath, durable goods consumption shrunk by 9.7%. Consumption of non-durable goods still grew healthily at 4.2%. Negative growth in durable goods consumption caused the Personal Consumption Index (PCI) to expand by only 0.8% in Q1/2024 compared to an expansion of 6.7% in 2023.

Will the 500 billion baht cash handout scheme help? It surely would. But the government must first find money for the scheme. As of March 2024, the entire banking system has 25.2 trillion baht in deposits and 30.5 trillion baht in loans. There is already a cash shortage of 5.3 trillion baht in the banking system. The government has to be innovative in finding the 500 billion baht of cash.

The second story is "No credit, no consumption". The Thai banking sector is not functioning and generated only 1.2% credit growth in Q1/2024, which is only half the growth generated in the previous quarter. The reasons are (1) liquidity shortage, which was just explained, and (2) a horrifying NPL level.

Do not be misled by the Bank of Thailand's report of NPL outstanding of 2.7% for household debt. If that is the actual figure, banks would still pump out more loans, even if that means borrowing more from foreign sources. Banks, as business entities, aim to maximise profits and will do anything that makes money. The real NPL figure of household debt is probably close to 20% and it is too risky to generate more credit.

The third story is the saddest one for me -- the dwindling manufacturing sector. The Manufacturing Production Index (MPI) contracted 3.7% in Q1/2024, a deeper contraction than the 2.9% decline in Q4/2023. This is an area of serious concern. No economy can be sustained without a strong production sector.

The dwindling manufacturing sector is not a result of soft domestic demand, as most economists see, but it is a competitiveness issue. Consumption robustly expanded at 6.2% and 7.1% in 2022 and 2023, respectively. Competitiveness deterioration is a direct result of an extended period of low investment to improve production efficiency. A part of the fault lies in the manufacturing sector itself. The sector failed to adapt to the rapidly changing world of competition.

Another part of the fault lies in the Thai banking system, which favoured consumption loans over business loans. At this point in time, the manufacturing sector is too outdated to be competitive. The situation is worse when China floods world markets with cheap exports. By the way, I read in the news that China, because of its soft economy, is buying less from the world and focusing on local supply chains. No wonder Thai exports (in value) declined by 10.2% in March 2024.

It seems Thailand is facing multiple incidences of bad luck as our brightest hope is growing dim. The tourism sector, which contributed 12% of GDP in 2019, is bound to contribute much less in 2024 and beyond. Foreign tourists still visit, albeit at somewhat lower numbers than in pre-Covid times, but they are spending much less. Before Covid, spending per tourist was about 45,000 baht. Now, they are spending 31,000 baht on average, which is 30% less. Service sector growth, which includes foreign tourist spending, declined to 7.4% in Q1/2024 from 17.7% growth in 2023. Growth for March 2024 is only 5.9%.

I want to add that the Bank of Thailand quietly helps the export and tourism sectors by intentionally depreciating the Thai baht. Since the end of 2023, the baht, measuring in NEER terms, has depreciated 2.8% against our trading partner's currencies. Even with the help of currency value, the Thai economy is still weak.

The Thai economy, as evidenced by first quarter performance, is in one of the most difficult periods, and the country needs professional management, not dramas and dream projects.

In my next article, with my limited capability as a retired economist, I will demonstrate some solutions for the economy. My solutions cannot solve all the problems, but I hope to relieve economic pain for the majority of the people of Thailand.

Chartchai Parasuk

Freelance economist

Chartchai Parasuk, PhD, is a freelance economist.

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