If political uncertainty remains and there is no December election - despite the announcement by Prime Minister Surayud Chulanont - negative impacts on the economy might be more than expected.

Politics has played a key role in the economy since last year, with confidence among local and international investors and consumers plunging following the coup.

Everyone hopes a new, elected government will return confidence and result in a pick-up in consumption and investment.

The economy is likely to recover if the election takes place on schedule, with consumption rising in the fourth quarter and investment in the first quarter of next year.

But what will happen if there is no December election?

Dampened domestic demand will continue. Consumers are not confident and investors do not like some of the policies of the military-backed government.

Exports cannot plug the gap because of the slowing global economy.

How much the economy will decelerate depends on how severe political doubts are.

If crude prices start to head north again, what will happen to the economy?

Headline inflation will surge before oil prices pass through into core inflation. Purchasing power will be lessened due to higher prices.

Continuing low growth and high inflation could result in stagflation.

Bank of Thailand Monetary Policy Group director Mathee Supapongse said this was unlikely because inflation was low. Core inflation is projected to be between one per cent and two per cent, compared with a target of zero to 3.5 per cent.

Mathee said if crude-oil prices surged to a worst-case scenario of US$76 (Bt2,644) to $77 a barrel, spurred by geopolitical conflicts, inflation would not exceed the 2-per-cent forecast.

The central bank has revised its economic-growth projection downward to between 3.75 per cent and 4.75 per cent for this year. It kept its inflation forecast unchanged, but noted it was likely to be in the upper range of the estimates for both headline and core inflation.

"Stagflation is not happening. Although the economy has slowed, inflation remains low. This is better than some countries that are experiencing low economic growth and high inflation," he said.

In the United States, some are expressing concern over stagflation after the world's largest economy grew at a slower pace but inflation rose.

Standard Chartered Bank senior economist Usara Wiraipich said the risk of stagflation in Thailand remained low because the economy would benefit from falling interest rates and an expansionary fiscal policy.

Moreover, inflation is low because of decreasing demand for oil and is buffered by the appreciating baht.

"But, there is a risk the economy may grow slower than expected because of falling exports thanks to a gloomy economy in the US and China's expected slowdown," Usara said.

"Geopolitical risk also remains, which could cause speculation in oil leading to an impact in the global and local economies," she said.

Politics is proving difficult for economists to put into economic projections. But the political situation is already reflecting the Kingdom's dampened domestic demand.

Assuming an election is held this year, the economy will slow slightly in the next two quarters before recovering in the fourth, Mathee said.

Recovery is delayed by one year compared with an earlier Bank of Thailand forecast.

Nobody wants further delays, but these are possible if "democratic" recovery is held back.

Anoma Srisukkasem

The Nation