1.2 World economic growth in the third quarter of 2006: grew at a decelerating rate led by the slowdownin US, China and Asian economies.
- The world economy in the third quarter of 2007 continually slowed down since the second quarter following the slowdown in major economies which include the US, China and Asian economies such as Singapore, South Korea, Malaysia and Philippines. This is in spite of the continued expansion of the Euro and Japan economies in the third quarter at the same rate as previous quarter and the speed-up of Hong Kong, Taiwan and Indonesia economies.
- The US economy continued to slow down, due mainly to a decline in private investment, in particular investment in residential construction caused by the slowdown in real estate sector and more tightening monetary policy. The Chinese economy softened after adopting measures to cool down the overheated economy such as raising interest rate, increasing the ratio of commercial banks' reserve requirement, controlling credits and new investment projects to prevent speculation in the real estate. This, as a consequence, led to a slowdown in investment in real estate and fixed asset. The economy of Euro area was on a slowdown trend owing to a slowdown in total investment following the strong growth in the second quarter and moderate export growth. The Japanese economy continued its recovery path as a result of higher net exports of goods and services and favorable investment in non-residential sector. However,
private consumption remained fragile. The Asian economy slowed down as well. Despite the fact that exports of goods and services were key engines of growth, exports of electronics tends to slow down, particularly those of the NIEs economies. This followed a slowdown in electronics demand in the world market and demand in the Asian economy resulting from greater tightening monetary policy during recent periods. Total investment slowed down in Malaysia and showed a negative growth in Indonesia and Philippines. In addition, private consumption slowed down significantly in Taiwan due to credit cards' problem.
- In the first nine months, the world economy performed well and the growth was broad-based The US, Euro, Japan and Asian economies grew stronger than in 2005, driven by exports and investment. Exports of goods and services in the first nine months expanded robustly, in particular Asian economy (including Japan) which gained from increasing world demand. Investment in non-residential sector expanded satisfactorily in China, US, Japan and the EU.
- Inflation in the first nine months was still high, particularly that in the US, the Euro and Asian economy, in spite of reduced inflationary pressure in the third quarter following recent falling oil prices. As a result, several central banks lifted up policy rate in the first and the second quarter, while the interest rates in the third quarter were kept stable. For example, the US Federal Reserve and the central bank of Malaysia maintained the policy rate at 5.25 and 3.5 percent respectively. Central bank of Indonesia cut the rate continuously to 10.25 percent in November.
2. Economic Projection for 2006: GDP growth is projected at 5.0 percent with 4.6 percent inflation rate, current account surplus of 0.2 percent of GDP and 1.8 percent unemployment rate
In the first three quarters, Thai economy expanded by 5.3 percent, primarily helped supported by exports which grew robustly in the first half of 2006. Strong export could compensate slowdowns in private consumption and investment the growth of which were smaller than in 2005 owing to higher inflation, interest rate, and high oil price. In addition, consumer and business confidence weakened partly due to domestic political situation. However quarterly economic growth indicated continued economic slowdown as a result of slowdowns in private expenditure and investment. Nevertheless, exports of goods and services started to soften in the third quarter resulting from high base of exports in the second half of 2005 in line with a recovery of electronic cycle and electronic equipment. Meanwhile, imports in the second half of 2005slowed down since government coordinated with the private sector to efficiently manage imports of steel, gold and oil. Overall, in the first three quarters, production and service sector related to exports gained higher benefits from the economy than those with current income and domestic economy.
Latest economic indicators in October 2006 showed that the economy continues its downtrend in the lastquarter of 2006. Private consumption expenditure and investment slowed down despite improved confidence, falling inflation and clear interest rate policy. It is expected that investors will continue tosuspend their decision on investment until the direction of the new constitution and next government are clear. In addition, there should also be a clear direction of investment on basic infrastructure and logistics. Some flood-affected group of people experienced several damage on crops and facing with higher food and crop prices which eventually affected income. Besides, rubber prices, one of key earning source of farmers slowed down rapidly in the first half of 2006. A positive factor for household spending in the last quarter of 2006 will be partly from expenditures in the Royal Flora Expo which somewhat compensate some impacts of flood. In the meantime, government expenditure and investment will soften since it is the period that the disbursement is still benchmarked to the 2006 fiscal year framework and government sector carefully manages cash during the interim period prior to the announcement of budget act of 2007.
On the export front, it is expected to slow down due to further world economic slowdown at the end of 2006. Overall, exports still expanded strongly. Imports, however, tend to accelerate following declining import volume of capital goods and raw materials in the first three quarters. Stock depletion and strong baht will also provide incentive to increase imports.
In all, NESDB expects that the economy in 2006 will expand by 5.0 percent, higher than 4.5 percent in 2005. This is an upward revision from previous projection of 4.2-4.7 percent released on the 4th September 2006. This upward adjustment is mainly due to a better-than-expected growth rate in the first three quarters of this year. The upward revisions are as follows:
1. Upward revision on the projection of government expenditures which can be disbursed earlier in the first three quarters and will partly offset a slowdown in private consumption. Therefore, it is expected that government expenditures in real term in 2006 will expand by 4.0 percent, significantly exceeding previous expectation of 0.8 percent.
2. Upward revision on the projection of export value from 14.0 percent to 16.8 percent, as a result of slight upward revision of export volume from 8.8 percent to 9.1 percent due to the better-than-expected world growth during the first ten months. In terms of US dollar, export value and volume will grow by 17.1 and 9.9 percent respectively.
3. Slight downward revision on the projection of import value from 8.8 percent to 8.3 percent. Import volume is downwardly revised from 1.2 percent to 0.3 percent. During the first ten months, import volume declined by 0.7 percent, however, import value rose by 8.1 percent as a result of higher import prices following higher oil price and higher price of capital goods and raw materials.
4. The headline inflation in 2006 is estimated to be 4.6 percent, which lies in previous projected range of 4.5-4.7 percent. Over the first 11 months, the headline inflation was 4.8 percent while core inflation was 2.4 percent.
5. The current account will record a small surplus of 0.1 percent of GDP
Revision of key assumptions for 2007 projection:
1. Slight upward revision of world economic growth rate from 4.7 percent to 4.8 percent. The US economy is slightly revised downward from 3.4 percent to 3.3 percent in line with a slowdown in the third quarter, while there were some upward revisions of key economies such as the EU, China, Singapore, Taiwan, Indonesia and Malaysia since their growth rates in the first three quarters were better than expected.
2. Downward revision of Dubai oil price from previously expected at 65-68 US dollars per barrel to 61.30 US dollars per barrel in this forecast.
3. Upward revision of export prices from 5.2 percent to 7.7 percent while import prices were also revised upwardly from 7.6 percent to 8.0 percent according to the latest information of October which indicated that prices increased higher than expected.
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