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SCB EIC downgraded Thailand’s 2023 growth forecast to 3.1% after lackluster outturns in Q2

SCB EIC revised down the Thai economic growth outlook in 2023 to 3.1% (from 3.9%) due mainly to much lower-than-expected outurn in Q2 and continued export contraction. Still, there remains impetus from private consumption and tourism sector. Foreign tourist arrivals experience a buoyant recovery and will approach 30 million people as projected this year, particulary the Middle East visitors that could be Thailand’s new potential target. As a result, the service sector recorded a steady rebound and helped reduce fragility in the labor market.

In 2024, we expect that Thailand’s economy will accelerate to 3.5% with an upbeat recovery in foreign tourists around 37.7 million. Also, private investment is expected to grow in line with the better trend of investment greenlights from Thailand’s Board of Investment (BOI). Also, Thai exports will regain momentum and provide thrust to overall growth in 2024.

Headline inflation is expected to escalate since Q4, but should remain anchored within the target range at 1.7% in 2023 and 2% in 2024—driven by higher energy and food prices. Meanwhile, the core inflation will likely stay elevated at 1.4% in 2023 and 1.5% in 2024. SCB EIC anticipates another policy rate hike in the September meeting to the terminal point of 2.5% since the Thai economy will continue to regain its potential. Inflation will encounter upside risks from higher energy and food prices. The real interest rate should therefore return to a positive trajectory, that will support Thailand’s economic and financial stability in the long term by preempting the buildup of financial imbalances during a prolonged period of low interest rates.

The global economic rebound will be increasingly unsynchronized. Based on our forecast, the global economic growth should ascend to 2.4% in 2023 and stand steady throughout 2024. The global economy has been outperforming the consensus. Yet, we observed a persistent fragility that could continue into 2024—as a result of rampant inflation, policy rate hikes among major economies, and depleting excess savings. Furthermore, China’s economy will face a slowdown over the short and long term as structural challenges could hamper the growth outlook.

Advanced economies’ rate hike cycle will come to an end within this year. Rising commodity prices could drive global headline inflation around the year-end. Likewise, core inflation in major economies should stay elevated as tight labor markets continue to support labor income. Against such backdrops, the US Federal Reserve tended to keep its current policy rate at 5.25-5.5% until Q2/2024. The European Central Bank and the Bank of England will slightly raise policy rates in the rest of 2023 and maintain their restrictive rates for the time being. Monetary easing is expected in 2H/2024 after core inflation subsides. In Asia, the People’s Bank of China has stayed the course on monetary easing to bolster a flagging economy. In contrast, the Bank of Japan will likely scale down its ultra-loose monetary policy—given signs of rising inflation. 

Looking ahead, The Thai economy will face with some major uncertainties. 1) China’s economic slowdown will hamper Thai exports, particularly products that engage in China’s supply chain and heavily rely on the Chinese market. The downturn in China will also somehow deter inward Foreign Direct Investment (FDI) from China and possibly weaken the demand of Chinese buyers in Thailand’s property market in some segments, and 2) Severe drought that is likely the most alarming in 41 years in many regions—according to our base case. This will potentially damage major crops such as off-season rice and sugar cane. Nonetheless, the farm income tends to remain unchanged in 2024 as higher crop prices should partly offset shrinking crop yields. In our baseline, the severe drought would slash Thailand’s GDP growth by -0.14 pp in 2023 and -0.36 pp in 2024, while it would drive inflation up by +0.18 pp and +0.45 pp in 2023 and 2024, respectively.

In addition, the new government policies also become a significant source of uncertainty. Massive stimulus plan, such as the digital wallet scheme, might help boost Thailand’s GDP growth to over 5% in 2024. Yet, the temporary growth must be traded off with longer-term fiscal burdens. Instead of a huge stimulus scheme, there is an alternative to facilitate the country by seeking for new growth engines to enhance our economic potential amid remaining economic scars from the COVID-19 pandemic as well as challenging environments from global value chain reallocation and climate change. Moreover, such a short-term yet massive government spending could deteriorate fiscal sustainability by accelerating Thailand’s public debt path to breach the public debt ceiling 70% of GDP around two years faster. This could also lessen room for fiscal space to cushion future uncertainties and to maintain overall fiscal stability.

SCB EIC proposes a set of long-term economic policy that should prioritize Thailand’s competitiveness and sustainable growth. 1) The policy should enhance Thailand’s competitive edges—both domestic and international levels—and broaden economic opportunities. To do so, the government can promote fair competition to improve the Trade Competition Act’s effectiveness and support Thailand in joining the Organisation for Economic Co-operation and Development (OECD). As an OECD member, Thailand could benefit from expansive export markets while strengthening its footing in the global supply chain. 2) The policy should propel sustainable economic growth via tax policy restructuring to reduce inequality by avoiding tax policy shcemes that could distort business or household decision-making.

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