Monthly Economic Bulletin (August 2024)

Global: Increasing vulnerability and risks

Tighter financial conditions and recent sell-off in equities have raised recession risks in advanced economies; key data point to decelerating growth rather than a hard landing

 

US: Weaker indicators and sentiment stoking recession fears, although economic data suggest a soft landing ahead; expect the Fed to cut rates by a total of 75bps this year

 

Eurozone: The economy has bottomed-out but could see slow growth amid rising uncertainty

 

Japan: Stronger consumption and strong services sector could encourage the BOJ to continue to unwind ultra-loose monetary policy

 

China: Structural weaknesses overshadow the positive impact of current stimulus measures, stalling the growth momentum gained earlier this year

 

Thailand: Smooth political transition so far, but economic direction might not change even with prompt appointment of a new cabinet and potential continuity in economic policies

 

Krungsri Research Forecasts for 2024

 

Election of new PM unlikely to alter Thailand’s economic outlook even with rapid appointment of a new cabinet and assurances of continuity in economic policies

 

2Q24 GDP grew by +2.3% YoY, up slightly from +1.6% in 1Q24; given this momentum and the latest political developments, we are likely to maintain our cautious growth outlook

 

Tourism sector remains an important economic growth driver; foreign tourist arrivals exceeded 3 mn in July and we maintain annual forecast at 35.6 mn

Thailand welcomed 3.1 mn foreign tourists in July, an improvement from 2.74 mn in June, driven by the extended free-visa measure and the school holiday season in neighboring markets such as China, South Korea, and Japan. In the first seven months of this year, tourist arrivals reached 20.6 mn (89% of pre-Covid level vs 71% in 2023) and generated THB 957bn receipts (90% of pre-Covid level vs 63% in 2023) led by Chinese tourists which made up the largest group; however, they are only 61% of the pre-Covid level. Tourists from Malaysia, India, South Korea, and Russia surged to 100-126% of pre-Covid levels. In August, there could be a boost from factors school holiday season in neighboring markets and summer holidays in Europe, which would keep tourist arrivals at over 3 million. We are maintaining our forecast of 35.6 million tourist arrivals in Thailand this year.

Public spending has been slow with less than 50% of the annual capital budget disbursed in 10 months of FY2024, but that could improve after the new cabinet is appointed 

According to preliminary data from the Ministry of Finance, current and capital budget disbursements fell by -12.8% and -8.7% YoY, respectively, in July. In the first 10 months of FY2024 (October 2023 to July 2024), disbursements from the current budget reached THB2.32 trn or 84% of the annual budget, rising 2.0% YoY. For the capital budget, the government has disbursed THB0.30trn or only 41% of the annual budget, falling -22.6% YoY. Public spending has been slower than expected, especially disbursements from the capital budget which is less than 50% of the annual capital budget. This is worrying given there are only two months left in the current fiscal year. However, budget disbursement is projected to improve following the appointment of a new cabinet.

Private investment is recovering but remains fragile amid structural issues in the manufacturing sector and pending clarity in politics and economic policies

The Private Investment Index improved slightly in June (+1.3% YoY and +0.6% MoM sa) but other investment indicators remained weak: (i) Business Sentiment Index (BSI) is at its lowest since October 2021 and below 50 for 10 consecutive months; (ii) Manufacturing Production Index (MPI) fell for the second consecutive month in June, by 1.7%, with capacity utilization rate remaining below-60% for nearly a year. We project private investment would recover slowly given slower-than-expected public sector investment. Combined with weak exports, this could lead to slow growth in private investment. Additionally, the still-fragile political scene in the country might continue to dampen investor sentiment

FDI applications approved for BOI incentives surged 40% (in value) in 1H24, suggesting improving investment in some key industries in the medium-term

 The Board of Investment (BOI) data for the first half of this year revealed it received applications for 1,412 projects (+64% YoY) with a total investment value of THB458 bn (+35% YoY). The board approved 1,451 projects (+37%) with a total investment value of THB476 bn (+27%) and issued certificates for 1,332 projects (+56%) with a total investment value of THB439 bn (+87%). The number of foreign direct investment projects which have been granted investment incentives surged 62% to 913 with a total investment value of THB360 bn (+40%). The electronics & electrical appliances industry attracted the largest investments, followed by the machinery & vehicles industry. The major sources of investments were China, Singapore, and Japan. The latest data suggest investment would improve in the medium term if there is clarity in domestic politics.

Exports face challenges from a slowing global economy and structural issues in domestic manufacturing

 

Fruit export benefits will end soon and recovery in the industrial sector is capped by structural issues, which suggest export growth will remain weak this year

In the first half of this year, Thai exports grew 2.0% YoY led by agricultural products which grew 7.6% (including rice and rubber). Exports of industrial products (computers & parts, and plastic products) expanded by 2.0%, while exports of agro-industrial products (rubber products, tapioca products, and sugar) fell by 1.9%. Exports remained weak in many domestic industries (including cars & parts, electronic ICs, chemical products, and plastic resin), reflecting structural problems in Thailand's industrial production sector. For the rest of this year, Thailand’s exports will continue to face several challenges that could hurt growth, including: (i) structural problems in the manufacturing sector, (ii) slowing exports from major Asian countries in July, and (iii) projected slowdown in the economies of Thailand’s major trading partners, including the US and China.

Exports rebounded strongly after the pandemic, but the surge in imports has intensified pressure on local industries, potentially weakening their competitiveness

Before the pandemic, Thailand typically enjoyed a trade surplus, with export growth exceeding imports by an average of 0.4%. After the pandemic, while export growth increased more than quadrupled to 5.1% on average, imports surged even more rapidly, climbing from -0.5% to 6.4%. The trade imbalance is particularly evident with China, which accounted for around 25% of Thailand’s total imports in 2023. Import growth from China surged more than doubled from 4.5% to 9.4. This growing reliance on cheaper Chinese goods could significantly undermine the market position of domestic businesses, especially SMEs and those in computers & electronics, electrical machinery, and other machinery & equipment sectors, which made up more than half of total imports from China in the first five months of 2024 and contributed 4.3% to GDP in 2023.

An influx of cheaper Chinese imports and a slower recovery in domestic production could hinder Thailand’s economic growth prospect

As domestic production stagnated or declined, post-COVID imports from China surged across most sectors. In some sectors, such as computers & electronics, electrical machinery, and other machinery & equipment, imports even surpassed local production. The food & beverages sector is one of the few maintaining positive trends. This sharp contrast presents two key challenges. First, the influx of cheaper Chinese goods intensified competition and might in part contributed to the closure of over 2,500 factories and nearly 66,000 job losses during 2023 to mid-2024. Second, domestic productivity might not have returned to pre-COVID levels, leaving local businesses struggling to keep pace with foreign firms. These dual challenges could threaten Thailand’s longer-term economic growth prospects.

Private consumption is steady, but consumer confidence continues to weaken amid concerns over the domestic political situation and high household debt

Thailand’s Private Consumption Index was stable in June (+1.5% YoY and -0.2% MoM sa), as stronger spending on services and non-durable goods was offset by weaker spending on durable goods, especially vehicle sales. For the rest of this year, private consumption would be supported by (i) growth in the tourism sector, bolstered by tourism stimulus measures; (ii) measures to ease the energy cost burden for households; (iii) a program to offer cheaper loans to vulnerable groups; and (iv) favorable agricultural product prices, which would boost farm income. However, unpredictable weather would still pose a risk to agriculture production. In June data revealed average nominal wage in the country had shrunk 0.7% YoY in the first half of this year. Additionally, high household debt and weak consumer confidence could limit consumption growth. The Consumer Confidence Index has dropped for the fifth consecutive month in July, to an 11-month low.

Headline inflation is likely to return to target range in Q4; expect BOT to hold policy rates throughout 2024