Economic Update

Published 27 Jun 2016

A stronger-than-expected performance in the first quarter has prompted analysts to revise their year-end growth forecasts for the Thai economy, though some remained cautious in the face of ongoing challenges both at home and abroad.

Data issued in May by Thailand’s National Economic and Social Development Board (NESDB) put year-on-year (y-o-y) growth for the first quarter of 2016 at 3.2%, the country’s highest in three years.

The positive results were attributed to high levels of state spending and a strong showing in Thailand’s tourism industry; however, weak export figures have sounded a note of concern.

State spending proves pivotal

Thailand’s economy expanded by 0.9% during the first three months of 2016, up from 0.8% in the previous quarter.

The results prompted the NESDB to revise its year-end forecast to between 3% and 3.5%, up from its previous estimate of between 2.8% and 3.8% in February. The Bank of Thailand (BoT), the country’s central bank, meanwhile, said it expects the Thai economy to expand by 3.1% in 2016. This comes on 2.5% growth in 2015.

Although the country’s economy has outperformed initial forecasts, growth remained uneven across sectors.

The government pumped BT654bn ($18.5bn) into the economy through direct expenditure and soft loans in a bid to stimulate growth and aid recovery.

Thailand recorded an 8% y-o-y increase in public consumption in the first quarter, while public investment was up 12.4%.  The injection of capital helped boost activity and offset more sluggish growth in the private sector, where consumption rose by just 2.3%. Private investment, meanwhile, inched up a more muted 2.1%, according to the NESDB.

Double-digit growth in the construction and tourism sectors contributed significantly to the first-quarter results.

Thailand’s construction sector was up 11.2% y-o-y, supported by strong public investment flows. Increased spending on infrastructure and project development is likely to continue, pointing to a bright outlook for the construction sector and its related industries through 2016 and beyond.

The number of incoming tourists, meanwhile, surged by 15.5% to reach 9m, putting Thailand on track to meet its target of 33m arrivals for the year. The NESDB expects the tourism industry to generate revenues of BT1.68trn ($47.6bn) this year, accounting for 12% of GDP, up from 10% last year.

Hotels and the hospitality industry also benefitted from higher tourist volumes, with the broader services sector recording 15.8% growth.

Setbacks and slowdowns

The first quarter results were more muted for other industries, including manufacturing, agriculture and exports.

Thailand’s manufacturing industry, which accounts for around 30% of GDP, contracted by 0.3% y-o-y, weighed down by declining vehicle output and a slower growth in related industries.

Capacity utilisation in the manufacturing sector remained stagnant at 64% in May, below the historical average of 68%, and could remain at this level due to weak export growth.

Agricultural output, meanwhile, was down for a sixth consecutive quarter, slipping by 1.5% y-o-y on lower demand and adverse weather conditions caused by the El Niño climate pattern, which brought drought to much of Thailand in early 2016.

According to the BoT, exports contracted 1.4% in the first quarter, with the government citing lower commodity and oil prices as well as weak global demand. Among the key segments in decline were industrial goods (7.8%), electronics (5.3%) and agricultural products (2.8%).

A stronger Thai baht, which is up by nearly 2% against the dollar year-to-date, is also expected to curb demand for Thai exports, according to the BoT, which expects exports to decline by 2% over the year – a downward revision from the previous forecast of zero growth.

Fluctuating forecasts

Despite broadly positive early indicators for the year, some experts remain cautious. DBS Bank, for example, warned that weak private sector demand, combined with poor showings in manufacturing and agriculture, could weigh on the country’s full-year growth prospects.

Commenting in a report issued in May, the bank cautioned that ongoing sluggish growth in Thailand’s manufacturing sector could put jobs at risk. The industry currently provides employment for around 16% of Thailand’s workforce.

DBS Bank said full-year growth looked likely to fall short of 3.5%, while also noting that first-quarter growth would have eased to 1.5% if not been for the public sector’s contributions.

The bank’s prediction followed a move in March by the Asian Development Bank to lower its forecast for Thailand’s GDP growth this year from 3.5% to 3%, citing slower growth in key global economies.

Amid continued economic uncertainty, the BoT chose to hold its key one-day repo rate at 1.5% in May. Senior officials at the BoT cited concerns over financial stability, along with the weakened debt service ability of agricultural households and small businesses.

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