Monthly Economic Bulletin (August 2023)

Global: Rate hike cycle will end soon; restrictive policies will continue to dampen growth

Despite lower risk of recession, global growth would remain weak by historical standards with slowing growth in advanced economies and China

Global growth is weakest since February, with a further contraction in manufacturing activity and slower growth in the services sector; Rate-hike expectation is lowest in 2 years

Headline inflation is softening in key countries with deflation concerns in China; core inflation remains high in advanced countries, suggesting their still-restrictive policies to continue

US: Fed has hiked rates to a 22-year high, as expected, leaving door open for a pause; data-dependent approach suggests the current rate-hike cycle would end soon

Eurozone: Combination of high interest rates and rising living costs suggest lingering recession risk, but ECB has signaled interest rates would peak soon

Japan: Despite surprise move by BOJ to adjust YCC, slowing inflation and economic activity will convince the BoJ to refrain from further policy tightening

China: Growth is weak like during initial reopening; waning post-covid demand, slowing external demand, property slump and limited policy space could threaten future growth

Thailand: Post-election uncertainty could threaten post-pandemic recovery

Krungsri Research Forecasts for 2023

Public spending: In 2H23, delay in government formation will disrupt disbursement of the current & capital budget and investments by state-owned enterprises

In June, public spending was weaker than in the same period in previous years, attributed to (i) accelerated disbursement of civil servants’ compensation in the previous period and high base last year due to extra budget to relieve the pandemic impact; (ii) acceleration of capital budget disbursements by transport and irrigation agencies in the previous period; and (iii) smaller investments by state-owned enterprises in energy and transportation projects. The NESDC (National Economic and Social Development Council) is preparing to consider approving state-owned enterprises’ investment budgets amounting to THB342 bn, to inject money into the economy in the fourth quarter (Oct- Dec) of this year if the FY2024 budget bill is not approved by then. The THB342 bn budget include (i) THB142.7 bn state enterprises’ budget for the calendar year, and (ii) THB200 bn investment budgets for the fiscal year, which might need Cabinet approval.

Tourism sector: July data show Chinese tourists hit the highest since reopening; we raised 2023 foreign tourist arrivals forecast to 28-29 mn but are concerned about tourism receipts

The Tourism Authority of Thailand’s data shows the country welcomed 2.48 mn foreign tourists in July, the highest since reopening and higher than 2.24 mn in June. In July, arrivals from China topped the list and exceeded 0.4 mn for the first time since Thailand reopened. In the first seven months of this year, tourist arrivals reached 15.39 mn (67% of pre-Covid/2019 level) and generated THB638 bn receipts (59% of pre-Covid level). For the full-year 2023, we revised up foreign tourist arrivals forecast to 28-29 mn from 27 mn previously, supported by more flights to Thailand, especially from China. However, the higher arrivals number is not expected to have a significant impact on total tourism revenue as the average receipt in the first 7 months of 2023 averaged only 41,000 baht/pax compared to 48,000 baht in 2019.

Exports: Contracts for ninth consecutive month in June; expect full-year growth to drop below our +0.5% forecast

Overall exports remained weak. Exports of some products grew, driven by specific factors.

In the first half of this year, Thai exports contracted by -5.4% YoY led by a -5.3% decline in orders for industrial products such as computers & parts and plastic resin, and a -2.8% decline in agricultural & agro-industrial products such as rubber and tapioca products. The recovery in the global tourism and services sectors boosted demand for fresh-frozen & dried fruits, while easing chip shortage encouraged exports of cars & parts and electrical appliances. However, Thailand’s exports remain fragile given the slower-than-expected economic recovery in China, weak global demand premised on sluggish manufacturing activity in major countries, and slower exports by key Asian countries.

Private investment could be delayed due to bleak export outlook, delayed public investment, and weak sentiment amid fragile domestic political scene

Private Investment Index fell 1.6% YoY in June led by drops in investments in machinery & equipment as well as in the construction category. The Business Sentiment Index (BSI) dropped to a 7-month low of 49.3 from 51.0 in June, following weaker confidence in the manufacturing sector triggered by weak exports. In addition, uncertainty in Thailand’s political scene could drag growth and weaken sentiment. Latest data by the Commerce Ministry show total investment value of applications had dropped to THB3.54 bn in June from THB6.69 bn in May and averaged THB9.08 bn per month in January-May period.

Private consumption tends to grow, led by recovering service sector and improving employment, but could slow down with the end of election activities, weaker confidence, and impact from drought

The Private Consumption Index rose 6.5% YoY in June, slowing down from +7.0% in May which received a temporary boost from election activity in May. However, there was still support from strong growth in spending on services. The improved employment situation is reflected in higher average weekly working hours of private employees, which has been rising over the past two years. However, the Consumer Confidence Index fell for the first time since June 2022, due to uncertainty in the formation of the new government nearly three months after the general election in May. In addition, private consumption continued to be pressured by elevated household debt, higher borrowing cost, lower agricultural income with the looming threat of smaller agriculture production triggered by drought.

Headline inflation remained low at 0.4% in July, below BOT’s target for the third month, but will rise again to the target range during the rest of the year

BOT might downgrade 2023 economic growth forecast, opening door to keep policy interest rate at 2.25% at September meeting

At the August 2 meeting, the MPC voted unanimously to hike policy rate by 25bps to 2.25%. It said Thai policy rates are now in a more neutral zone, and the economy is returning to its growth potential but is not overheating, unlike some countries. Hence, monetary policy should support growth that tracks the economy’s potential in the current uncertain environment, which includes: (i) a slowing world economy; (ii) political uncertainty which could delay FY2024 budget for longer than expected, which would hurt sentiment and investments; and (iii) the predicted El Niño conditions (drought) which are likely to drag growth in 2H23. The MPC showed less-hawkist stance at its latest meeting, and although the committee sees risk of El Niño pushing up world food prices, which would pressure domestic inflation, the correlation between changes in global cost of food and domestic prices is relatively weak (see chart). And, with softer demand-pull inflation, we see limited impact. In addition, the BOT might revise down 2023 growth and inflation forecasts at its September meeting as high risk and uncertainty would hurt the Thai economy.. Therefore, we expect the MPC will keep rate at 2.25% for the rest of 2023.