I eagerly awaited the release of the Q2/2024 GDP growth figure which became available on Monday. The 2.3% growth figure, presented by the Office of the National Economic and Social Development Council (NESDC), did not surprise me. A friend had warned me that the quarterly growth could be as high as 2.5%, even though my estimation for the quarter was only 1.0%.
There are three reasons why my GDP growth estimate for Q2 was 1.0% and lower than 1.6% growth in Q1. First, private consumption would be substantially weaker as private credit growth contracted by 45.6 billion baht in Q2 as opposed to an expansion of 158 billion baht in Q1.
Second, the number of foreign tourists dropped from 9.4 million in Q1 to 8.1 million in Q2. This drop caused y-o-y tourist growth to markedly decline from 43.5% to 26.3%. Third, the unusually high electricity production growth of 10.9% in Q1 dropped to a more natural growth rate of 6.0% in Q2.
All these figures were released by the Bank of Thailand (BoT) and other governmental agencies before the official GDP announcement by the NESDC. As an economist, it would be impossible to see lower consumption (accounting for 56% of GDP) and tourism income (accounting for 14%) to generate better GDP growth than Q1. But I made a mistake by overlooking an important factor -- "net exports".
Correction. I did not overlook the "net exports" factor which caused me to underestimate GDP growth by a large margin. The NESDC's net exports figure was not in line with the BoT's figure in the same category.
By the way, the NESDC's "net exports" data is equivalent to the "current account" data of the BoT. Both represent export of goods and services income less import of goods and services income.
According to the BoT monthly data release, the current account surplus was US$2.61 billion (93.6 billion baht) in Q1/2024 and $2.55 billion (93.7 billion baht) in Q2/2024. With an identical level of current account surplus, there is no reason for net exports in NESDC's GDP account to significantly differ between Q1's and Q2's.
This is where I was wrong. The NESDC's GDP data showed 83.7 billion baht of net exports surplus for Q1 and showed 147.8 billion baht of net exports surplus for Q2, indicating a 77% improvement in income from the external sector. No wonder the GDP figure improved despite lower consumption, investment, and tourism income. These two governmental organisations, the BoT and NESDC, clearly live in different countries.
To ensure my calculation was correct, I repeated it three times and arrived at the exact same numbers.
Please do not question the BoT's data accuracy as it is the originator of all external sector data. The NESDC simply plugs in the BoT's external sector data into its GDP spreadsheet. Out of curiosity, I playfully reduced Q2's net exports surplus figure to 83.7 billion baht as in Q1's, Q2's GDP growth figure would be reduced to 1.1%.
As an economist, I really do not pay much attention to whether the real GDP figure is 2.3% or 1.1%. The figure is a record of the past. If Q2 saw a good economy, the people of Thailand would already be enjoying it and the government would be praised. If Q2 saw a weak economy, the people would be suffering and the government would be blamed. With a 28% drop in home sales and a 24% drop in car sales, there is no need to use the imagination to consider whether Q2 was a period of joyfulness or a period of suffering. Thai people did not need the NESDC to tell them.
The important question is the story behind the Q2 growth figure as it would foretell what is to be expected in Q3 and Q4. Let us put the data accuracy question aside and continue with stories behind the Q2 GDP figure. Economic data for Q2 confirms that Thailand is not investing for the future.
Fixed capital formation has not only recorded negative growth for three consecutive quarters but the contraction gets worse each quarter. Capital formation growth shrank 0.4% in Q4/2023, 4.2% in Q1/2024, and 6.2% in Q2/2024. Sustained contraction of investment indicates a dying economy. A living economy would see an investment growth rate over 5% a year.
While we are not investing for the future, we are eating our flesh for today. Private consumption growth was 7.4%, 6.9%, and 4.0% respectively, during the mentioned quarters. It is abnormal for an economy to slow down production but accelerate consumption. This could be the reason why the BoT is very reluctant to lower interest rates. Thai people would just consume more, not invest more.
The centre of the problem lies in the behaviour of Thai banks. Banks favour consumer loans over corporate ones. But there is a high price to pay as consumer loans are not productive to an economy. At present, Thai banks may qualify as zombie banks -- banks that operate normally but fail to expand loans. Loan contraction in Q2 is clear evidence of such a status. With household debt reaching 91% of GDP and an ailing production system, it would be difficult to see banks expanding loans regularly in the near future. Banks would not "legally" collapse as the BoT makes sure such things do not happen, but they will be in a zombie-like stage and cannot support economic growth. For the new government, the zombie banking system is the first thing they need to fix -- not stimulate consumption.
Where does Thailand go from here? Surely, everybody is thinking about big economic stimulus packages like the digital wallet plan. Theoretically, I am not in favour of such an idea because the package would spur more consumption which the economy does not need. The economy needs investment for our future. Besides, if the government handout money is for consumption, Thai people will rush to buy Chinese products.
I have nothing against China. Their products are great and cheap. For your information, while domestic consumption is subsiding due to a lack of new credits, imports from China rose 7.6% in Q2/2024. The growth rate was 15.4% in the month of June.
Personally, I think the digital wallet scheme has reached a dead end from imminent legal risks. The legal risks are using the 2024 fiscal budget in the 2025 fiscal year and the risk of breaching the Currency Act by issuing competing currency. The penalty for violating the budget law is that all cabinet members approving such usage of a carried-over budget would be liable to repay the used amount of 122 billion baht in full. This is why the new prime minister said she has to listen to coalition parties about the scheme. To avoid the legal risks, the handout could be limited to government welfare card-holders and distributed in cash, which would be about 150 billion baht. Therefore, the impact of the handout would be invisible like the half-half copayment scheme with a total distribution of 234.5 billion baht.
These are my quarterly growth projections for 2024 which I made at the beginning of the year -- 1.5% for Q1, 1.0% for Q2, 0.0% for Q3, and -1.5% for Q4. I still stand by these figures regardless of what the NESDC's figures might be.
Chartchai Parasuk, PhD, is a freelance economist.