Thailand’s economy, the second-largest in Southeast Asia, finds itself in a precarious position as it grapples with slower-than-expected growth in the second quarter of the year. This sluggish performance is attributed to weak exports and a reduction in investment, casting a shadow over the strength in the tourism sector and leading the government to revise its 2023 growth forecast downwards. Notably, Thailand’s main trading partner, China, is experiencing a slowdown in its economic growth, which is undoubtedly having a ripple effect, while domestic political instability following the May elections has shaken investor confidence.
The country’s gross domestic product (GDP) grew by a mere 1.8% in the April-June period from a year earlier, according to the National Economic and Social Development Council (NESDC). This falls significantly short of the anticipated 3.1% expansion predicted by economists in a Reuters poll. The dampening of the economy is further reflected in the falling export volumes, down 5.7% year-on-year, and a decrease in government spending by 4.3%. These factors have collectively led to a 2.8% on-quarter decline in fixed asset investment. Consequently, the government has been forced to trim its 2023 GDP growth forecast to between 2.5% and 3.0% from an earlier range of 2.7% to 3.7%, potentially stalling the central bank’s plans to raise rates.
Sluggish Growth in Thailand’s Economy
Thailand’s economy, the second-largest in Southeast Asia, has experienced a much slower-than-anticipated growth in the second quarter as a result of weak exports and slower investment, which have overshadowed the strength of its tourism sector. Consequently, the government has revised its 2023 growth forecast.
Q2 Economic Performance Lags Behind
According to the National Economic and Social Development Council (NESDC), Thailand’s gross domestic product (GDP) expanded by a mere 1.8% in the April-June period from a year earlier. This rate is significantly below the 3.1% expansion economists predicted in a Reuters poll. In the first quarter, GDP had increased by 2.6% year-on-year, a figure that was revised down from the initially reported 2.7%.
A drop in export volumes by 5.7% year-on-year and a 3.3% decrease in manufacturing output were key contributing factors to the sluggish growth. Government spending, a significant component of national GDP, also fell by 4.3% and further impacted fixed asset investment, which dropped by 2.8% on-quarter.
Revised Growth Forecast and Monetary Policy
This global demand weakness has pushed the government to reduce its 2023 GDP growth forecast from the initial 2.7%-3.7% to 2.5%-3.0%. This revision suggests that the central bank may not be in a hurry to increase rates again any time soon. This view is supported by Shivaan Tandon, an emerging Asia economist at Capital Economics, who believes that the Bank of Thailand will likely refrain from further rate hikes this year due to the weak economic recovery and inflation being below target.
The Bank of Thailand has increased its benchmark interest rate seven times to 2.25% since last August to control inflation and promote a smooth economic recovery. However, Central bank Governor Sethaput Suthiwartnarueput recently indicated that the current key rate is nearly balanced and could remain stable or be increased at the next meeting on Sept. 27.
Political Uncertainty and Economic Outlook
Political uncertainty further clouds Thailand’s economic outlook. NESDC head Danucha Pichayanan warns that investor confidence could take a hit if issues arise during the transition to a new government. The country has been under a caretaker government for five months, and the political uncertainty is set to continue after the victors of the May election, Move Forward, were blocked from forming a government by conservative legislators allied with the royalist military.
Looking forward, while weak global demand is affecting exports, Thailand’s economy is being propped up by its essential tourism sector and private consumption growth. Despite maintaining a forecast of 28 million foreign tourist arrivals this year, the NESDC expects tourism revenue to decline.
Thailand’s economy is undoubtedly facing significant challenges, with the economic growth lagging behind expectations, political uncertainty, and reduced investor confidence. However, the strength of its tourism sector and private consumption growth could potentially help offset these headwinds. The situation calls for careful monitoring of economic indicators and political developments, as they will play a crucial role in shaping the country’s economic trajectory in the coming months.