2. Economic Projection for 2008
2.1 The world economic outlook: the global economy tends to decelerate further
World Economic Growth
(% YOY)
2006 ------------- 2007 ------------ ---2008--- 2008f 2008f
Q1 Q2 Q3 Q4 Year Q1 Q2 APR AUG
World 5.3 4.6 5.0 5.3 4.7 5.1 4.8 n.a. 3.8 4.0
United State 2.9 1.5 1.9 2.8 2.5 2.0 2.5 1.8 1.0 1.6
Eurozone 2.8 3.1 2.5 2.6 2.2 3.0 2.1 1.5 1.4 1.6
Japan 2.4 2.8 1.6 1.9 1.8 2.1 1.2 1.0 1.4 1.2
Singapore 9.4 6.4 8.7 8.9 5.4 7.7 6.9 2.1 4.0 4.0
Korea 5.1 4.0 4.9 5.2 5.7 5.0 5.8 4.8 4.2 4.8
Philippines 5.4 7.1 7.5 6.6 7.4 7.2 5.2 n.a. 5.8 5.6
Malaysia 5.9 5.5 5.7 6.7 7.3 6.3 7.1 n.a. 5.0 5.5
China 11.6 11.1 11.9 11.5 11.2 11.9 10.6 10.1 9.3 10.0
Vietnam 7.9 7.7 8.8 8.7 9.3 8.2 7.5 6.5 7.3 6.8
Source: CEIC, Public agencies and average value from many sources
Key issues of the world economy in the second half of 2008
(1) The U.S. economy has not yet bottomed out and tends to decelerate further in the remaining of 2008. The most recent indicators showed that the slump in property market has not yet bottomed out. In July, housing starts and building permits continued to decline by 11 percent and 17.7 percent respectively, more than market expectation. The repercussion effects from financial and property markets are likely to drag on real economic activities as credit standards have been more tightened. Against this background, the U.S. economy is likely to grow by 0.5 percent and 0.2 percent (annualized qoq) in the third and fourth quarters respectively which will generate the rate of economic expansion of 1.6 percent for the whole year of 2008, slow down from the 2.0 percent growth in 2007. Household spending and investment are likely to slow down as:
- The impacts of tax rebate on consumption spending dissipate in the third quarter.
- Household wealth will continue to decline in response to falling property prices, and weak labor market with high unemployment rate of 5.3 percent in the second quarter.
- Credit standards have been more stringent. Tightened credit conditions are likely to hinder the expansion of consumption and investment spending. In the face of rising defaults and stricter credit standard, the existing tight credit market condition will be aggravated by the recent problems at Fannie Mae and Freddie Mac. This situation likely to curb credit growth further.
- High oil prices have taken a toll on consumption and business profits.
- Consumer confidence has deteriorated.
- In the first half of 2008, the stronger rate of economic expansion than market expectation was partly driven by the increase of net exports. However, the slowdown of economic activities in Asia and Europe tends to limit the U.S. export expansion in the remaining of 2008.
(2) The economies in Asia are likely to slow down. Recent indicators pointed to stronger corrections of Asian economies in the second half of 2008, as demand for their exports weakened. Accordingly, Singapore revised its forecast for non-oil exports from an expansion to a contraction of 2-4 percent; meanwhile Malaysia reported its lowest industrial production growth in 10 months. In addition, the continue inflation acceleration has shifted monetary policy in various countries from easing/neutral to neutral/tightening biases. This situation tends to curb global economic expansion in the remaining of 2008.
In the second quarter, Japanese economy shrank to its worst performance in seven years and is likely to lose its momentum as oil prices remained high and consumer confidences has weakened. In addition, emerging Asian economies which have been the main engine for its export expansion are likely to slow down. Overall, the Japanese economy is expected to decelerate from 2.1 percent in 2007 to 1.2 percent in 2008.
Chinese economy has decelerated since the second quarter of 2007. Investment and exports slowed down. In the face of rising labor costs, higher rate of interest and high oil prices, business profits and sentiments are negatively affected, in particular under the pressure of excess production capacity. Therefore, the Chinese economy is expected to grow by 10 percent, slow down from 11.9 percent in 2007.
(3) In the remaining of 2008, the Euro zone economy is likely to decelerate further. In the second quarter, Euro zone GDP contracted (annualized qoq) for the first time since the launch of the single currency in 1991. As sentiment and purchasing indicators remained particularly weak, the economic activities are expected to decelerate further, particularly in the face of inflation acceleration and the slowdown of economic activities in its export markets such as the U.S. and other European countries. Therefore, the Eurozone economy is expected to slow down from 3.0 percent in 2007 to 1.3 percent in 2008.
The slowdown of major economies and monetary policy tightening are likely to slow down economic expansion in emerging countries. In particular, China and India which are expected to decelerate from 11.9 percent and 9.2 percent in 2007 to 10.0 percent and 8.5 percent respectively. Therefore the global economic expansion is likely to cool down from 5.1 percent in 2007 to 4.0 percent in 2008.
2.2 Economic outlook in the second half and the whole year of 2008: The Thai economy is likely to moderate in the second half as exports expansion tends to soften in tandem with prospect of world economic slowdown while private consumption and investment spending are unlikely to fully recover. However, the solid growth pace in the first half of 2008 has provided economic momentum and strongly contributed to the annual growth, which is projected at 5.2-5.7 percent.
2.2.1 Key themes
- In the first half of 2008, the Thai economy expanded at a faster pace than previously expected which helps provide the growth momentum to the economy, but the expansion of domestic demand remained sluggish. However, in the second half, there are several supporting factors to support the recovery of domestic demand.
- In the second half of 2008, the Thai economy is projected to grow at a slower pace than in the first half (with growth rate of 5.7 percent). The slower pace of economic expansion is attributable to the trend of slowing down in export expansion in accordance with the deceleration of the global economy. Meanwhile domestic demand is expected to continue with further recovery. However, the recovery will not yet be full-fledged within this year. In addition, economic growth rate in the last quarter will be the expansion from a high base in the latter half of 2007 (4.7 percent in Q3/50 and 5.8 percent in Q4/50) while the third quarter is likely to face with the peak of inflation.
- Export of goods and tourism services tends to moderate due to the global economic deceleration, in particular, exports of electronic products, vehicle & transport equipment, and electrical appliances that showed signs of slowing down in the second quarter. The expansion of tourism sector will be subjected to the slowdown of global economy, and the increase in transportation and travel costs that are stemmed from oil prices and inflation acceleration. The domestic uncertainty would also cause tourists some concerns and thus hamper a robust growth.
- In the second half of 2008, the government packages to retrieve the economy and to alleviate the impact from high oil price and inflation (6 measures for relieving economic crisis within 6 months) are expected to contribute to the expansion of private consumption and investment. However, growth rates of private consumption and investment are likely to be moderate as their expansion subjected to the following limitations; (i) High oil prices despite relatively lower than in the first half of the year (ii) Inflation is expected to reach its peak of around 8.0-9.0 percent in the third quarter and decelerate in the last quarter. (iii) Business sentiments remained weak and the growth of investment will be the increase from its high base in the latter half of 2007.
- In the second half of 2008, measures to manage risks that are stemmed from high oil prices and its associated inflationary pressures remain in need. At the same time, the upward cost pressures remained persists reflected in the 14.4 percent rise in producer price index in the first 7 months. Moreover, there are a number of consumption commodities in the process of price adjustment consideration after some postponements.
2.2.2 Supporting factors for economic recovery. The expansion of consumption and investment in the second half of 2008 will be underpinned by the following supportive factors:
(1) The implementation of the government measures to support the recovery of consumption and investment as well as to strengthen competitiveness in private sector, which are including tax measures to raise disposable income and support disadvantage people, tax measures to stimulate investment and strengthen competitiveness, financial measures for supporting SMEs to increase their production efficiency, measures to provide credit and financial capital for people and grassroots economy, tax measure to stimulate real estate sector, and measures to alleviate the negative impacts of high oil prices and to increase disposable income of low-income group for 6 moths.
(2) The increase in prices of major crops (rice, cassava, rubber, oil palm) will contribute to farmers’ incomes expansion. Price of major crops remained higher than last year. Average farmers’ income increased by 23 percent in the first quarter and followed by the much stronger growth of 53.2 percent in the second quarter of this year. Major crop prices are expected to continue with decent rises in the second half as the world supply will still be under constraint despite some already supply responses of some crops such as rice and maize while oil prices still remain solid and thus benefiting energy crops.
(3) Provisional raise in government officials and employees’ salaries as well as compensation for other workers in public sector effective since 1st May 2008. Also, increase in minimum wage since June 2008. Therefore, the impacts of those raises should be effectively pronounced in the second half of the year.
(4) Real interest rates remained low. Despite tighter monetary policies, with increased both the policy rate and the interest rate in the market, the higher increasing rate of inflation has led to low and declining real interest rate. More rapid rise in prices of goods and services as compared to that of financial cost or deposit rates would stimulate demand. That said low real interest rates will induce higher consumption and investment.
2.2.3 Risk factors associated with growth prospects of the Thai economy in the second half of 2008
(1) The global economy expected to slowdown, which subsequently will affect Thai export in the later half of the year. Global economic slowdown is expected to be more broad-based covering Asia, namely re-coupling of the world. Therefore, Thai’s exports will face more impacts in the second half. Accompany with rise in export volume of agriculture products as many country had increased their supply and thus eased market condition somewhat. In addition, drainage of rice stock, by China and Vietnam, and rubber stock, by China, will adversely affect Thai export.
(2) Slow recovery of investment especially for government investment that contracted in the second quarter, while private investment has tendency to slow down. Particularly in such an environment of high cost of production with demand decreased and domestic market slowdown.
(3) Oil price is likely to level off but volatility remained, from level of production, natural disaster, and unrest violence in oil exporter country. This in turn could trigger volatility in price of consumer goods.
(4) Weakening current account from trade deficit, from import of crude oil. Accompany with net capital outflow, which partially are portfolio reshuffling tactics of foreign investor to compensate losses from sub-prime crisis. Thus, balance of payment has tendency to weaken caused Thai baht to depreciate further.
(5) Consumer confidence and business sentiment declined from higher living expense and domestic political uncertainty. With news on global economic slowdown and damage to the global financial sector have also play a vital role.
(Continue to).../2.3 Key Assumptions..
2.1 The world economic outlook: the global economy tends to decelerate further
World Economic Growth
(% YOY)
2006 ------------- 2007 ------------ ---2008--- 2008f 2008f
Q1 Q2 Q3 Q4 Year Q1 Q2 APR AUG
World 5.3 4.6 5.0 5.3 4.7 5.1 4.8 n.a. 3.8 4.0
United State 2.9 1.5 1.9 2.8 2.5 2.0 2.5 1.8 1.0 1.6
Eurozone 2.8 3.1 2.5 2.6 2.2 3.0 2.1 1.5 1.4 1.6
Japan 2.4 2.8 1.6 1.9 1.8 2.1 1.2 1.0 1.4 1.2
Singapore 9.4 6.4 8.7 8.9 5.4 7.7 6.9 2.1 4.0 4.0
Korea 5.1 4.0 4.9 5.2 5.7 5.0 5.8 4.8 4.2 4.8
Philippines 5.4 7.1 7.5 6.6 7.4 7.2 5.2 n.a. 5.8 5.6
Malaysia 5.9 5.5 5.7 6.7 7.3 6.3 7.1 n.a. 5.0 5.5
China 11.6 11.1 11.9 11.5 11.2 11.9 10.6 10.1 9.3 10.0
Vietnam 7.9 7.7 8.8 8.7 9.3 8.2 7.5 6.5 7.3 6.8
Source: CEIC, Public agencies and average value from many sources
Key issues of the world economy in the second half of 2008
(1) The U.S. economy has not yet bottomed out and tends to decelerate further in the remaining of 2008. The most recent indicators showed that the slump in property market has not yet bottomed out. In July, housing starts and building permits continued to decline by 11 percent and 17.7 percent respectively, more than market expectation. The repercussion effects from financial and property markets are likely to drag on real economic activities as credit standards have been more tightened. Against this background, the U.S. economy is likely to grow by 0.5 percent and 0.2 percent (annualized qoq) in the third and fourth quarters respectively which will generate the rate of economic expansion of 1.6 percent for the whole year of 2008, slow down from the 2.0 percent growth in 2007. Household spending and investment are likely to slow down as:
- The impacts of tax rebate on consumption spending dissipate in the third quarter.
- Household wealth will continue to decline in response to falling property prices, and weak labor market with high unemployment rate of 5.3 percent in the second quarter.
- Credit standards have been more stringent. Tightened credit conditions are likely to hinder the expansion of consumption and investment spending. In the face of rising defaults and stricter credit standard, the existing tight credit market condition will be aggravated by the recent problems at Fannie Mae and Freddie Mac. This situation likely to curb credit growth further.
- High oil prices have taken a toll on consumption and business profits.
- Consumer confidence has deteriorated.
- In the first half of 2008, the stronger rate of economic expansion than market expectation was partly driven by the increase of net exports. However, the slowdown of economic activities in Asia and Europe tends to limit the U.S. export expansion in the remaining of 2008.
(2) The economies in Asia are likely to slow down. Recent indicators pointed to stronger corrections of Asian economies in the second half of 2008, as demand for their exports weakened. Accordingly, Singapore revised its forecast for non-oil exports from an expansion to a contraction of 2-4 percent; meanwhile Malaysia reported its lowest industrial production growth in 10 months. In addition, the continue inflation acceleration has shifted monetary policy in various countries from easing/neutral to neutral/tightening biases. This situation tends to curb global economic expansion in the remaining of 2008.
In the second quarter, Japanese economy shrank to its worst performance in seven years and is likely to lose its momentum as oil prices remained high and consumer confidences has weakened. In addition, emerging Asian economies which have been the main engine for its export expansion are likely to slow down. Overall, the Japanese economy is expected to decelerate from 2.1 percent in 2007 to 1.2 percent in 2008.
Chinese economy has decelerated since the second quarter of 2007. Investment and exports slowed down. In the face of rising labor costs, higher rate of interest and high oil prices, business profits and sentiments are negatively affected, in particular under the pressure of excess production capacity. Therefore, the Chinese economy is expected to grow by 10 percent, slow down from 11.9 percent in 2007.
(3) In the remaining of 2008, the Euro zone economy is likely to decelerate further. In the second quarter, Euro zone GDP contracted (annualized qoq) for the first time since the launch of the single currency in 1991. As sentiment and purchasing indicators remained particularly weak, the economic activities are expected to decelerate further, particularly in the face of inflation acceleration and the slowdown of economic activities in its export markets such as the U.S. and other European countries. Therefore, the Eurozone economy is expected to slow down from 3.0 percent in 2007 to 1.3 percent in 2008.
The slowdown of major economies and monetary policy tightening are likely to slow down economic expansion in emerging countries. In particular, China and India which are expected to decelerate from 11.9 percent and 9.2 percent in 2007 to 10.0 percent and 8.5 percent respectively. Therefore the global economic expansion is likely to cool down from 5.1 percent in 2007 to 4.0 percent in 2008.
2.2 Economic outlook in the second half and the whole year of 2008: The Thai economy is likely to moderate in the second half as exports expansion tends to soften in tandem with prospect of world economic slowdown while private consumption and investment spending are unlikely to fully recover. However, the solid growth pace in the first half of 2008 has provided economic momentum and strongly contributed to the annual growth, which is projected at 5.2-5.7 percent.
2.2.1 Key themes
- In the first half of 2008, the Thai economy expanded at a faster pace than previously expected which helps provide the growth momentum to the economy, but the expansion of domestic demand remained sluggish. However, in the second half, there are several supporting factors to support the recovery of domestic demand.
- In the second half of 2008, the Thai economy is projected to grow at a slower pace than in the first half (with growth rate of 5.7 percent). The slower pace of economic expansion is attributable to the trend of slowing down in export expansion in accordance with the deceleration of the global economy. Meanwhile domestic demand is expected to continue with further recovery. However, the recovery will not yet be full-fledged within this year. In addition, economic growth rate in the last quarter will be the expansion from a high base in the latter half of 2007 (4.7 percent in Q3/50 and 5.8 percent in Q4/50) while the third quarter is likely to face with the peak of inflation.
- Export of goods and tourism services tends to moderate due to the global economic deceleration, in particular, exports of electronic products, vehicle & transport equipment, and electrical appliances that showed signs of slowing down in the second quarter. The expansion of tourism sector will be subjected to the slowdown of global economy, and the increase in transportation and travel costs that are stemmed from oil prices and inflation acceleration. The domestic uncertainty would also cause tourists some concerns and thus hamper a robust growth.
- In the second half of 2008, the government packages to retrieve the economy and to alleviate the impact from high oil price and inflation (6 measures for relieving economic crisis within 6 months) are expected to contribute to the expansion of private consumption and investment. However, growth rates of private consumption and investment are likely to be moderate as their expansion subjected to the following limitations; (i) High oil prices despite relatively lower than in the first half of the year (ii) Inflation is expected to reach its peak of around 8.0-9.0 percent in the third quarter and decelerate in the last quarter. (iii) Business sentiments remained weak and the growth of investment will be the increase from its high base in the latter half of 2007.
- In the second half of 2008, measures to manage risks that are stemmed from high oil prices and its associated inflationary pressures remain in need. At the same time, the upward cost pressures remained persists reflected in the 14.4 percent rise in producer price index in the first 7 months. Moreover, there are a number of consumption commodities in the process of price adjustment consideration after some postponements.
2.2.2 Supporting factors for economic recovery. The expansion of consumption and investment in the second half of 2008 will be underpinned by the following supportive factors:
(1) The implementation of the government measures to support the recovery of consumption and investment as well as to strengthen competitiveness in private sector, which are including tax measures to raise disposable income and support disadvantage people, tax measures to stimulate investment and strengthen competitiveness, financial measures for supporting SMEs to increase their production efficiency, measures to provide credit and financial capital for people and grassroots economy, tax measure to stimulate real estate sector, and measures to alleviate the negative impacts of high oil prices and to increase disposable income of low-income group for 6 moths.
(2) The increase in prices of major crops (rice, cassava, rubber, oil palm) will contribute to farmers’ incomes expansion. Price of major crops remained higher than last year. Average farmers’ income increased by 23 percent in the first quarter and followed by the much stronger growth of 53.2 percent in the second quarter of this year. Major crop prices are expected to continue with decent rises in the second half as the world supply will still be under constraint despite some already supply responses of some crops such as rice and maize while oil prices still remain solid and thus benefiting energy crops.
(3) Provisional raise in government officials and employees’ salaries as well as compensation for other workers in public sector effective since 1st May 2008. Also, increase in minimum wage since June 2008. Therefore, the impacts of those raises should be effectively pronounced in the second half of the year.
(4) Real interest rates remained low. Despite tighter monetary policies, with increased both the policy rate and the interest rate in the market, the higher increasing rate of inflation has led to low and declining real interest rate. More rapid rise in prices of goods and services as compared to that of financial cost or deposit rates would stimulate demand. That said low real interest rates will induce higher consumption and investment.
2.2.3 Risk factors associated with growth prospects of the Thai economy in the second half of 2008
(1) The global economy expected to slowdown, which subsequently will affect Thai export in the later half of the year. Global economic slowdown is expected to be more broad-based covering Asia, namely re-coupling of the world. Therefore, Thai’s exports will face more impacts in the second half. Accompany with rise in export volume of agriculture products as many country had increased their supply and thus eased market condition somewhat. In addition, drainage of rice stock, by China and Vietnam, and rubber stock, by China, will adversely affect Thai export.
(2) Slow recovery of investment especially for government investment that contracted in the second quarter, while private investment has tendency to slow down. Particularly in such an environment of high cost of production with demand decreased and domestic market slowdown.
(3) Oil price is likely to level off but volatility remained, from level of production, natural disaster, and unrest violence in oil exporter country. This in turn could trigger volatility in price of consumer goods.
(4) Weakening current account from trade deficit, from import of crude oil. Accompany with net capital outflow, which partially are portfolio reshuffling tactics of foreign investor to compensate losses from sub-prime crisis. Thus, balance of payment has tendency to weaken caused Thai baht to depreciate further.
(5) Consumer confidence and business sentiment declined from higher living expense and domestic political uncertainty. With news on global economic slowdown and damage to the global financial sector have also play a vital role.
(Continue to).../2.3 Key Assumptions..