Monthly Economic Bulletin (October 2022)

Global: Bigger challenges ahead

IMF sees big challenges for the global economy, shaped by lingering effects of the Russian-Ukraine war, a cost-of-living crisis, and economic slowdown in China

The IMF projects global growth will slow down from 3.2% in 2022 to 2.7% in 2023 (0.2 percentage points below July forecast). There is a 25% probability that 2023 growth could fall below 2%. More than a third of the global economy will contract this year or next. Downside risks remain elevated.

Global manufacturing activity has dropped to contraction zone despite easing supply disruption; weaker orders suggests trade flows will continue to slow down

 

US: Current economic expansion with risk of entrenched inflation suggests Fed will remain hawkish, which raises fears of a recession in the period ahead

 

Europe: Might fall into recession in Q4 amid weaker consumption, worsening energy supply crunch, and tightening monetary conditions

 

China: Challenging to boost growth in a fragile economy given zero-Covid policy, weakening economic drivers, and latest technology restrictions

 

Japan: Expect a gradual recovery with an improving services sector but growth would be capped by intensifying global headwinds

 

Thailand: Overall economic activity has almost returned to pre-pandemic level but recovery is fragile and uneven across sectors

 

Krungsri Research Forecasts for 2022-23

 

Economic recovery in Thailand: Economic activity (reflected by GDP) is projected to return to pre-Covid level late this year or early next year 

 

Demand side: Key economic drivers, except tourism, have exceeded pre-Covid levels but exports could lose momentum amid the global slowdown

 

Tourism sector continued to recover following the removal of most Covid-19 measures and restrictions since 4Q22 worldwide, including Thailand 

 

Despite higher cost of living, private consumption is stable following easing of Covid-19 restrictions, gradual recovery in tourism activity and stimulus measures

 

High farm income and recovering labor market would support consumption but high household debt and rising interest rates could continue to limit spending growth

Farm income surged more than 18% YoY for the second consecutive month. Labor market also recovered, reflected by the number of insured under Section 33 which continued to rise, albeit still below pre-pandemic level. However, the high cost of living, volatile energy prices, high household debt (more than 88% of GDP in 2022), and rising interest rates could affect debt repayment ability. These would cap consumer spending growth in the next period.

Private investment recovering gradually amid pressure from rising  costs, weak sentiment and export slowdown

 

Exports might lose momentum given the slowdown in major trading partners’ economies 

 

More signs of slower exports by major Asian countries amid weaker global demand

In August, Thailand’s export volume rebounded along with the easing supply chain disruptions, reflected by car & parts exports which booked positive growth for the first time in 8 months. However, there are negative signals including further deceleration of Asian exports amid a slowdown in the global economy and weaker demand from China. South Korea's exports tumbled 20.2% YoY in 1-10 October. Taiwan's exports fell 5.3% in September, posting negative growth  for the first time in more than two years.

Supply side: Overall business activity is approaching pre-covid level; Services sector has expanded faster than Manufacturing sector since relaxing restrictions

 

Manufacturing production: Most sectors remain weaker than pre-covid levels   

Manufacturing Production Index (MPI) for the first 8 months of this year rose 2.7% YoY. Industries which have recovered past pre-pandemic levels and are showing stronger momentum include electrical appliances and petroleum amid ASEAN reopening and improving tourism activity. Industries which production have exceeded pre-pandemic levels and are stable include IC & Semiconductor as upside is capped by supply disruption. Industries which production remain below pre-pandemic levels but are showing stronger momentum include Rubbers & Plastics, Automotive, Cement & Construction and Food & Beverages given improving domestic demand and recovering tourism activity. Industries which production remain below pre-pandemic levels and continue to register weak momentum include Textiles & Apparels, Chemicals and HDD, because of slowing global demand.

Services sector has recovered substantially this year but activity in some key segments remain far below pre-Covid levels

The Service Production Index (SPI) for the first 8 months of this year expanded sharply by 12.1% YoY with tailwinds from reopening and relaxation of containment measures. Production in many service segments has recovered past pre-pandemic levels and are registering stronger momentum, led by Wholesale & Retail Trade, Real Estate Activities and Information & Communication. Segments which activity remain weaker than pre-covid levels but are improving include Accommodation & Food Service and Transportation & Storage, supported by improving tourism and domestic activities with the removal of most pandemic restrictions. Indices for Accommodation & Food Service and Transportation & Storage are 22.1% and 57.0% below pre-pandemic level, respectively.

Services sector is recovering stronger than manufacturing, but key sectors are still fragile 

Manufacturing industries which have recovered past pre-Covid levels and are registering strong growth account for 13.8% of total manufacturing production. Services industries in the same classification account for 51.5% of total services production. Manufacturing and services industries which remain weaker than pre-pandemic levels but are registering improvements account for 48.4% of total manufacturing production and 24.2% of total services production, respectively. These industries have growth potential but recovery remain fragile, especially  Accommodation and Transportation. 

Manufacturing sector financial health: Uneven recovery, concerns over high debt burden and weaker external demand

Thanks to Thailand’s recovering economy and the low-base last year, most manufacturing industries are registering better Interest Coverage Ratio (ICR), implying corporate profits are rising and they are meeting their debt obligations. The exceptions are Cement & Construction and Textile & Apparels which continue to be pressured by weak demand and higher cost of living. However, most of their balance sheets have not improved, especially Chemicals industry, with Debt-to-Equity (DE) ratios yet to reach pre-Covid (2019) levels, implying risks from a global economic slowdown and interest rate hike cycle. Industries which saw improvements in Interest Coverage Ratio and Debt-to-Equity ratio are Automotive and Rubber & Plastics given improving chip supply and healthy demand for rubber products. 

Services sector financial health: Gaining momentum amid reopening tailwinds but remain weak in Accommodation and Real Estate industries

We have seen broad-based recovery in industries which have benefited substantially from reopening tailwinds and rising pent-up demand, such as Wholesale & Retail Trade, Transportation & Storage, Information & Communication, and Professional, Scientific & Technical. The exceptions were Accommodation & Food Service and Real Estate industries which continue to be pressured by rising material costs and the interest rate tightening cycle. Despite the strong recovery in tourism activity – albeit still far below pre-Covid level - we spot red flags in Accommodation & Food Service with their high debt leverage and worsening interest coverage ratios, implying the financial health of businesses in this industry remain fragile and vulnerable to future shocks. 

Headline inflation starts to ease in Q4 but still pressured by volatile global crude prices

 

Fragile and uneven recovery in Thailand suggests domestic rate hikes should be gradual to continue to nurture overall economic growth