- The Thai economy contracted by 7.1 percent on the year in Q1/2009, deteriorated further from a 4.2 percent contraction in Q4/2008. The sharper-than-expected contraction was primarily attributed to the collapse in global demand that has caused the Thai exports to fall severely and also discouraged household consumption and private investment. The impact of export-led-contraction was seen across sectors of the Thai economy.
- The private sector reduced investment activities quickly, especially in the manufacturing sector where there has been a sharp fall in export demand and large rise in excess capacity. The unemployment rate adjusted higher and employment growth fell as a resultant consequence of a reduction in production.
- On the quarter, however, the economy contracted by 1.9 percent, moderated from a 6.1 percent decline in Q4/2008. That seems to imply that the Thai economy is in a stabilizing process at the low level and positive quarterly growth should return in H2/2009 due to the inventory cycle as well as global and local policy stimulus. Other supporting factors for growth are low oil and consumer prices and low interest rates. However, the bottoming out process could be protracted if the recovery in global economy delay or domestic political disruption takes over.
- NESDB expects that the Thai economy will contract (-3.5)-(-2.5) percent for 2009 as a whole, contributed by sharp contraction in H1 and a turnaround to positive growth in H2. Effective implementation of government stimulus packages and sustained recovery in global economy will be key factors to ensure the turnaround in H2. In turn, the effectiveness of the government policy is conditional upon two very key factors, namely public confidence and political stability.
- Lower oil and other commodity prices in a midst of fragile demand suggest much softer CPI inflation in 2009 than in 2008; NESDB expects the inflation to average (-0.5)-(0.5) percent. The current account surplus will soar to 9.3 billion USD or 3.7 percent to GDP on the back of large trade surplus during the economic downturn and improved service account driven by tourism income.
- Risks associated with the economic outlook are fragile recovery of the world economy, low public confidence, and domestic political uncertainty.
- Economic management in the remaining months of 2009 should focus on enhancing policy effectiveness to promote sustained recovery into the longer term. Disbursement of public funds and implementation of public projects must be promptly executed.
1. Economic Conditions in the first quarter of 2009
1.1 In the first quarter of 2009, the Thai economy was hit by deep global economic recession that had caused Thailand’s export and tourism incomes to fall sharply. The fall consequently eroded household consumption expenditures and investment. The sharp drop in exports of goods and services and resultant decline in private consumption and investment, therefore, contributed to marked GDP contraction in 10 years.
Key Highlights
- The World economy, in the first quarter of 2009, plunged notably by 4.0 percent but recently there have been signs of stabilizing which seem to suggest that worst synchronized collapse in global demand might be already behind. The sharp and broad-based contraction in the first quarter followed the small contraction started in Q4/2008. However, the world financial crisis that has already caused tight credit condition and liquidity problem in financial institutions, and loss of wealth and confidence has inevitably affected the real sector where its impacts are felt more clearly in the second quarter. The impacts in the real sector were seen in sharp decline of consumption, investment, and production. The cut in production has left the world economy with growing excess capacity and higher unemployment rate. Demand for goods and services in major economies have dropped. As a result, the world trade volume fell ignificantly and contagious effects via international trade have prevailed more clearly in various countries in the first quarter of the year, especially in the major exporters in Asia where their exports fell tremendously and the contraction has lingered for several months. Most countries affected by the global
crisis have launched similar recovery and stimulus measures. These include, for example, drastic cut in
interest rate cut, liquidity injection into the financial system using conventional and unconventional quantitative easing methods, eased and expansionary fiscal policy ranging from tax cut, government budget expansion both in terms of current and capital spending. In this respect, most countries have given priority to public investment for improving quality of infrastructures to increase productivity and long term competitiveness. It is expected that accommodative monetary and fiscal measures would be increasingly
effective in the second half of this year as the multiplier effects kick in. The policy impacts in each country shall, in turn, spillover and enhance the recovery process of each other through international trades. In this way, the global recovery would be sustained into the longer term.
- However, on the positive notes, in March and April 2009, there were some encouraging signs suggesting that the world economy is being in the stabilization process at the low level and the bottoming out of the recession is approaching. The improvement has been seen in consumer confidence, moderate contraction in manufacturing goods production and de-stocking. Moreover, the results of the stress tests on 19 large banks indicate that that several large banks are ordered to plump up their equity cushions
to the lesser extent than expected. The test results point to less capital required to be raised for the banking system and, therefore, has eased the financial sector in the US and Europe. Hence, the Fed’s stress tests of large financial innovation should help restore confidence that systematic risks can be managed.
- For the Thai economy, real GDP plunged by 7.1 percent in the first quarter, continued from a contraction of 4.2 percent in the last quarter of 2008. The sharper-thanexpected economic contraction in this quarter was contributed by sharp decline in exports and along with private consumption and investment contraction driven in part by the export slump. On top of the hit from the global demand shock, political uncertainty is set to exert a nagging drag on spending and investing activities. The impacts of global financial crisis on real sectors have been felt in many countries and thus resulted in a drastic fall in global trade. Sharp drops in export volume and value were seen in various countries in the first quarter of this year, following the contraction already started in the last quarter of 2008. Similarly, consumption and investment spending have been ebbed and declined in many countries; the contraction was in part led by the slump in export sector. This adverse feedback loop has spurred the global downturn in the last quarter of 2008 into the worse-than-expected economic contraction in the first quarter. Inevitably, Thailand’s export dropped markedly both in volume and value terms, and in all major export destinations. Main export goods which experienced large falls are auto and parts, electronics, electrical appliances, including key agricultural products ranging from rice, tapioca, rubber, and maize. Rapid decline in export has led to production cut down and large rise in excess capacity. As a result, working hours and employment has been reduced and the layoffs risen. Household incomes and purchasing power have been eroded and consumer and business confidences in Thailand deteriorated and were exacerbated further by domestic political disorder. The first quarter, therefore, recorded a large decline in private consumption expenditures and investment albeit the falling oil prices and inflation. In sum, the sharp contraction in real GDP experienced in the first quarter was mainly driven by export related and its adverse impacts on private investment and
On the quarter, the economy contracted by 1.9 percent (QOQ, sa), less severe contraction as compared to 6.1 percent decrease in the last quarter of 2008. To this end, the Thai economic contraction was full-fledged technical recession. However, the slower pace of quarter on quarter economic contraction implies that the Thai economy is passing through stabilization process and likely to be bottoming out of recession in the second quarter of 2009.
- The driving forces underling the sharper-than expected contraction of real GDP in the first quarter are as follows:
(1) The contagious effects stemmed from global economic recession have caused Thailand’s export and tourism incomes to fall more severely than that already experienced in the last quarter of 2008.
- The negative impacts of global financial crisis on real sectors in various countries were stronger than in the las t quart e r of 2008. The world economy contracted at a faster pace of 4.0 percent compare to that of 0.2 percent in the fourth quarter of 2008 due to the decline of confidence, wealth destruction and credit crunch condition. These factors substantially lowered consumption,
- The major economies that experienced with a sharp economic contraction included the US
- Up to present, these impacts seem to linger for the months to come. The March figures showed that export of many countries continued to decline markedly. The continued sharp fall in exports were
- The global recession, consequently,resulted in the sharp decline of Thailand’s
(2) Private consumption and investment spending dropped by 2.6 and 17.7 percent respectively, as compared to 2.1 percent increase and a decline of only 1.3 percent respectively in the fourth quarter of 2008. This was attributable to the spillover from global recession that resulted in export and production contraction which has elevated excess production capacity and massive layoffs. The increase in unemployment rate and the decline in export prices of key agricultural commodities together with weakening consumer confidence had eroded consumption spending. Investment in business sector continued to decline due to the uncertainty in global economic condition, falling global demand, domestic political uncertainty, stricter credit standards, more cautious practices in extending credit by the banking sector, and unattractive conditions for raising funds in the capital market.
- Production sector output contracted rigorously in various sectors including manufacturing sector, construction, transpo r tation & communication, wholesales & retails trade, and hotels & restaurants. However, financial sector continued to expand but at a slower pace in line with the slowdown in credit extension and interest rate incomes of commercial banks that was reflected by the reduction of the ratio of net interest rate incomes to assets (NIM) from 3.46 percent per annum to 2.95 percent per annum.
(1) Manufacturing production contracted by 14.9 percent compare to 6.8 percent contraction in the fourth quarter of 2008. Both domestic and exportoriented production declined. In the first quarter manufacturing production with export to total production ratio of more than 60 percent and of 30-60 percent contracted markedly by 22.3 percent and 15.9 percent respectively compared to that of 11.5 percent and 10 percent in the fourth quarter of 2008. The manufacturing production that recorded a marked decline are electronics products including integrated circuits, television, air conditioners and automobile & parts thereof. An average capacity utilization rate was reduced to 57.8 percent, much lower than that of 73.5 percent in the same period last year. This reflected the substantial excess production capacityin manufacturing which will delay new investment expansion in the remaining of 2009. The production sector with capacity utilization rate of lower than 50 percent included, for example, electronic products (45.6%), electrical appliances (42.9%) automobile and transportation equipments (43.6%), iron and steel products (35.6%),leather and leather products (26.1%), footwear (39.6%), and furniture (26.5%).
(2) Construction sector output was down markedly by 7.9 percent, marking the fourth consecutive quarter of contraction but slightly improved compare to the contraction of 12.8 percent in previous quarter. The strong contraction of construction sector was attributable to the decline of consumer confidence and stricter credit standard. In the first quarter, private investment spending on construction retreated by 8.2 percent while government investment spending on construction declined by 9.4 percent. However there was supportive factors for construction expansion which included the reduction in price of construction materials of 9.1 percent, the first decline in 11 quarter that mainly attributable to 28.1 percent and 0.1 percent reduction in the price of metal and cement products respectively.