1.2 World economic situation in the First Quarter of year 2007
The global economy in the first quarter of 2007 slowed down from the last quarter of 2006 as a
result of deceleration in G3 economies (namely US, Eurozone and Japan) as well as the Asian economies with
an exception of the Chinese economy which continued to grow faster.
- The US economy expanded 2.1 percent - the lowest growth rate it has seen since the second
quarter of 2003. The deceleration, from 3.1 percent the previous quarter, was mainly due to a decline in
growth rates of private consumption and exports of goods and services on top of a further contraction of
private investment — most notably in construction and housing. Amid declining prospects of growth in the
property market demand and the consequential threats of excess supply, number of new building projects fell.
This contraction in supply, in conjunction with a further decline in the total expenditure on purchases of
new and second-hand housings, has been the reason for eightconsecutive- month descent in property prices.
- The Eurozone economy continued on a solid recovery path despite growing at a slightly slower
pace than seen in the fourth quarter of last year. Led by a concerted descent in growth rates of the German,
French and Italian economies, the overall Euro economy was subject to a slight fall in the rate of growth,
from 3.3 percent in the last quarter down to 3.1 percent in the first quarter of 2007. Paralleled with a
fall in growth, inflation rose from 1.8 percent in the previous quarter to 1.9 percent this quarter as a
result of further escalation in energy costs and expansion of money credits, prompting the European Central
Bank to raise interest rates from the previous level of 3.25 percent to 3.5 and 3.75 percent respectively in
January and March 2007. Despite growing more slowly, the Euro economy’s unemployment rate managed to improve
from 7.3 percent to 7.6 percent over the recent quarter.
- The Japanese economy expanded by 2.0 percent, compared with 2.2 percent in the previous quarter
owing to a decline in private investment growth. Nevertheless, the growth in net exports of goods and
services remained a significant driving force behind the Japanese economic growth, whereby exports of
computer parts and accessories account for the large part of the Japanese export surge.
- The Chinese Economy managed to maintain a rising trend in growth rates, having grown by 11.1
percent this quarter compared with 10.4 percent in the fourth quarter of 2006. Favorable growth rates of
exports and fixed asset investment were the main supporting factors of growth of the overall economy. Value
of exports growth remained robust at 27.9 percent whereas value of imports grew by 18.2 percent, improving
the Chinese trade position further with the newly calculated surplus amounting to 46.5 billion US dollars —
a twofold soar from the 23.1 billion US dollars recorded in the same quarter of last year. Inflation climbed
upward to 2.7 percent.
- The Asian Economy slowed down as a result of a deceleration in exports of goods and services
that corresponds to the current economic slowdown among the major trading partner countries. The economies
of Singapore, Taiwan, South Korea and Malaysia had slowed down. Domestic demand, nonetheless, did expand to
some countries, most fundamentally in the cases of private consumption in Indonesia, Malaysia, and the
Philippines
2. Economic Projection for 2007
The Thai economy in the first quarter of 2007 showed favorable growth with stability, but trended
downward compared to the growth rates of 6.1, 5.0, 4.7 and 4.3 percent in first to fourth quarters of 2006
respectively. The key fundamentals which remained sound include increased employment level and low
unemployment rate, significantly lessened inflationary pressure, a decline in public debt-to-GDP ratio and a
current account surplus. Moreover, interest rates in money market were adjusted downward. The mentioned
favorable factors are expected to support furthereconomic growth in the rest of 2007.
Nevertheless, there was increasing imbalance associated with economic growth from 2006 upto the
first quarter of this year, which the export sector grew rapidly and became the main engine of economic
growth while private spending and investment slowed down considerably. Some downside risks, both external
and internal factors that should be taken into consideration also remained. External factors include a
cooling down of the US real estate sector which could turn into a real estate bubble burst, a potential
stock market bubble in China, the US-China trade conflicts and a pressure from industrialized countries on
the Chinese to allow the RMB to appreciate according to the market tides. Moreover, crude oil price is
rising amidst geopolitics uncertainty, oil production limitation and risks from natural disaster.
On internal fronts, attention should be on the significant slowdowns of domestic consumption and
investment. It is important that the government improve understanding and restore confidence of the general
public as well as domestic and foreign investors, by providing access to accurate information and
persistently undertaking economic steering measures consistent with the announced schemes such as
infrastructure investment projects, environment related proposals by the petrochemical project phase 3 of
the National Environmental Board, and projects which currently await approval from the Board of Investment.
2.1 Positive Factors in the rest of 2007
2.1.1 Pressure on prices and monetary contraction will enhance purchasing power and
confidence of the people.
(1) Inflation rate is likely to decrease. As a result, purchasing power and confidence
of consumer will increase. Headline inflation apparently decreased in the first 5 months and producer price
index also declined from 7 percent in 2006 to 2.6 percent in the first quarter and 1.8 percent in April.
Particularly, price of crude material group adjusted downward 3.4 percent and price of intermediate
materials fell 0.2 percent during the first 5 months which indicated that inflationary pressures to consumer
price is likely to ease. Over the remaining months of this year, factors that will help maintain low
inflation include an appreciation of Thai Baht, a slowdown of domestic spending, and a potential slow down
of agricultural product prices. However, rising oil price would pressure the production cost upward, though
the impacts on prices of consumer products would not be substantial since the price level had already
endured significant upward adjustment starting early 2005 to 2006. Therefore, the current weakness in
domestic demand would limit producers’ ability to pass on their higher cost to consumers.
(2) Interest rate has declined and is likely to fall further over the remainder of 2007.
The Monetary Policy Committee gradually cut policy rate - a total reduction of 150 basis points in the first
5 months of 2007, from 5 percent at the end of 2006 to 3.50 percent at the end of May 2007, which was lower
than the Fed Fund Rate by 175 basis points. In line with the policy rate, financial institutions have
responded by gradually lowering the saving rates since January 2007, followed by the reduction in lending
rate. The Minimum Loan Rate (MLR) of five large commercial banks averaged 7.25 percent at the end of May,
down from 7.75 percent at the end of 2006. Average 12- month time deposit rate decreased from 4.5 percent to
2.38 percent at the end of May. Nonetheless, real interest rate remained relatively unchanged since
inflation adjusted downward at a faster pace than deposit and lending rates, limiting the effectiveness of
monetary policy stimulation particularly under the current circumstance of fragile consumer confidence.
Moreover, it should be noted that the downward adjustment of lending rates by financial institutions was
slower than that of policy rate and deposit rates, therefore it is likely that financial institutions would
lower the lending rate further to encourage credit needs. However, credit approval tends to be more
stringent during an economic slowdown. In addition, the policy rate is expected to be lowered further under
the conditions of the apparent slow down in private spending and investment.
2.1.2 Income from export and tourism will expectedly continue to increase and help
support economic growth. Export opportunities have been on a rising trend in many markets such as, China,
India, ASEAN and Japan. Their growth rates in the first 4 months of 2007 were high but slightly fell from
their previous levels in 2006. The economy in those countries still have potential to grow strongly in 2007,
providing favoring prospects for Thai export growth and partly weathering the impact of the U.S. economic
slowdown. Nevertheless, exports of computer related products and integrated circuits to China, India, and
Japan exhibit signs of a mild slowdown. All in all, total exports in the latter half of 2007 would have more
constraints than in the former due to a slowdown of the world economy, Baht appreciation and increasing
intense trade barriers under the pressure over Asian countries to curb down on exchange rate intervention
measures.
Tourism is expected to expand continually. Tourism Authority of Thailand set the target for growth
in the number of foreign tourist at around 8.0 percent, based on the total of 13.78 million international
tourists in 2006. The increase will support hotel and restaurant sectors in Thailand. The supporting factor
works through public relations in order to make a better understanding and the safety of tourists, the
agreement on facilitation and entry visa exemption for the tourists staying in the country for 30 days or
less.
2.1.3 Increased government budget and investment budget of state enterprises will
support economic growth. In fiscal year 2007, the government approved larger amount of government and SOEs
investment budget than the budget in the fiscal year 2006. The budget ceiling in fiscal year 2007 is
1,566,200 million Baht, increased by 15.2 percent from the fiscal year 2006. Investment budget is 374,721
million Baht. Meanwhile, SOEs investment budget approved by the cabinet is 369,302 million Baht, higher than
303,430 million Baht in fiscal year 2006, whereby on 11 May 2007 the government spent 51.71% of this allowed
budget. And of the investment budget for state enterprises, 67.70 percent has been spent. Government
expenditure in each area averaging no less than 80% of the total budget is expected to significantly
mitigate the current dampening down of private investment and consumption, thus generating economic
stability during the second half of this year.
2.1.4 The increased total employment level in the presence of low unemployment rate
bolster household earnings. Total employment level recorded a 1.9 percent gain in the first quarter of this
year, where employment went up 2.2 percent in the agricultural sector and 1.7 percent in nonagricultural
sectors. Unemployment rate was 1.6 percent, having fallen from 1.9 percent recorded in the same period of
2006. Nonetheless, the labour market starts to reveal signs of a possible forthcoming rise in unemployment.
They are (i) a slowing down of employment growth in construction and real estate, retail, wholesale and
financial sectors (ii) under-employment level rising from approximately 520,000 units in the first quarter
of last year to 630,000 units in the first quarter of this year (iii) a fall in the number of job offer to
new-jobapplicants ratio in conjunction with a stagnant newjob - applicants to job-placements ratio implying
a likely continuance of employment growth deceleration provided the production and investment sectors do not
show clear signs of recovery, as well as indicating a poor match between the natures of demand and supply in
the labour market and (iv) in spite of a lower unemployment rate in the first quarter of this year in
comparison to that recorded at the same point of last year, labour demand was not able to absorb all new
available labour supply. This resulted from higher growth rate of the labour force which expanded 1.47
percent in the first quarter of this year compared with 1.06 percent in the same quarter of last year.
(Continue to).../2.2 Risk Factors..