“Amazing” Thailand has amazed again, only this time on the downside. After its stunning 18.9 percent rise in gross domestic product for the December quarter, Southeast Asia’s second-biggest economy has now officially entered into a recession for the first time since 2009.
On Monday, Thailand’s National Economic and Social Development Board (NESDB) said GDP had dropped by 0.3 percent in the June quarter compared to the previous three months. The decline satisfied the technical definition of a recession by falling for the second straight quarter, following the previous quarter’s 1.7 percent contraction.
On an annualized basis, growth eased to 2.8 percent, down from 5.4 percent in the previous quarter and coming in below market expectations of a 3.3 percent rise. The main weaknesses were in private consumption, which dipped below its long-term average, with manufacturing contracting and investment growth moderating.
Net exports also contracted, hit by a stronger baht and weaker sales to China, Thailand’s biggest export market, along with those to the United States and Europe.
“We now see significant downward risks to our 2013 growth forecast of 5 percent [GDP growth],” ANZ analyst Eugenia Fabon Victorino said in an August 19 research note.
“The manufacturing production index, our favored GDP indicator, has been posting annual contractions in four out of the past six months. Our momentum indicator still points to further weakness in production in the coming months,” he added.
The NESDB also downgraded its projections, reducing its forecast for 2013 growth to a range of 3.8 to 4.3 percent from 4.2 to 5.2 percent previously. The projections were down from last year’s official 6.5 percent growth, although inflation was predicted easing to 2.3 to 2.8 percent from last year’s 3 percent.
Market reaction was swift, with the Thai baht hitting a one-year low Tuesday and stocks on the Bangkok bourse slumping on the news. According to Bloomberg News, overseas investors had their biggest sell-off of Thai stocks in six weeks, selling $114 million worth of Thai equities as the benchmark SET Index dropped near December 2012 levels.
Nevertheless, Thailand’s government has told investors not to worry unduly over the growth surprise.
"The Thai economy is not in a worrisome state. All should not be panic," Thailand’s Deputy Prime Minister Kittiratt Na-Ranong was quoted as saying by The Nation.
According to the Thai daily, the deputy leader told other ministers at a cabinet meeting that “the economy is not entering recession as it still shows growth compared to the same period last year,” although admitting it depended on government spending and measures to boost exports.
Bank of Thailand governor Prasarn Trairatvorakul was also quoted saying the economy would bounce back in the third quarter.
"Looking deep into the NESDB indicators, investment remains positive despite slowing consumption," he said.
However, the Thai Chamber of Commerce was less optimistic, revising down its forecast for the nation’s GDP growth to a range of 3.5 to 4 percent, from 5 to 6 percent previously, on weaker exports and sluggish domestic demand.
ANZ’s Victorino said the Bank of Thailand would likely keep official interest rates steady at 2.5 percent in its August 21 meeting, a forecast backed by all 20 economists surveyed by Bloomberg News.
Amid rising household debt, Victorino said the central bank would refrain from any moves that would exacerbate the impact of higher interest rates on the nation’s leveraged consumers.
“With household consumption accounting for 51.9 percent of total GDP we see any challenges to household consumption significantly weighing on overall growth. As of June, loans by Thai commercial banks to individuals have increased 20.7 percent [year to date],” he said, saying household leverage now accounted for 68 percent of the entire economy.
The analyst said private consumption would remain sluggish in coming months amid weak consumer confidence, with an expected recovery in net exports yet to materialize.
Thailand and other regional economies also face the prospect of worsening current account balances as the US Federal Reserve moves to reduce its monetary stimulus.
Nevertheless, moves to lower regional trade barriers could ease fears of another Asian financial crisis. On Monday, ASEAN and six regional partners including China and Japan held their first minister-level negotiations on moves to create a regional comprehensive economic partnership, which could result in a free trade zone encompassing a third of global economic output.
For Thailand and its neighbors, a trade boost could prove timely amid the threat of further capital flight to Wall Street and China’s faltering economy.