Guru Speak

A resounding thump seems to have taken the place of any holi¬day cheer this year. Rich coun¬tries are collectively expected to face the deepest recession since World War II. Emerging markets, whose financial systems so far have remained relatively unscathed, are unlikely to be so lucky with their real economies.

Conditions are deteriorating very quickly as a result of the sharp slowdown in demand from rich countries. In the case of Thailand, the impact will be espe¬cially hard, given that the extend¬ed political crisis at home over the past few years has dampened domestic demand, making exports the main driver of growth.

But with worsening prospects for exports throughout the region - Thailand's export growth con¬tracted 18.6 per cent last month - this last hope for growth seems likely to fade quickly.

Monetary policy is a relatively blunt instrument in this situation. The Bank of Thailand's historic 1percent reduction in the policy interest rate to 2.75 per cent at this month's Monetary Policy Committee meeting helped lower companies' cost burden some¬what, but as firms face worsening demand prospects - every day brings news of declines in export orders - firms are likely to cut down on labour costs.

The relatively low October unemploy¬ment data from the National Statistical Office (1.2 per cent) and the persistent economic weakness indicate the labour market has so far remained flexible, with unemployed workers reentering the labour force with relative ease. However, the head¬line unemployment data masked a more worrying trend by employers, who tend to cut costs by first reducing overtime and bonus payments before actually laying off workers, begin¬ning with migrant and lowskilled employees, followed by higherskilled employees.

This trend hides the fact that employ¬ees' incomes may have in reality fallen substantially, particu¬larly for lowincome workers, whose over¬time pay can account for up to half of their monthly income. In addition, the shift of labour from the manufacturing sector to the agricultural or serv¬ices sector may actually entail a significant decline in income, which is not reflected in the unemployment numbers. These changes are likely to be reflected in lower purchasing power and lower consumption, further depressing domestic demand.

Going forward, with expecta¬tions of both a continued drop in export orders and weak domestic demand, a coordinated response by monetary and fiscal authori¬ties is required to support the economy. In the absence of infla¬tionary pressures, monetary poli¬cy can alleviate the financial bur¬den on firms. At the same time, any fiscal stimulus should be tar¬geted directly at those affected sectors. The government's planned Bt180billion publicspending package, which is intended to create new jobs, can play an important part in sup¬porting employment. At the same time, measures to help the cost of living of lowincome groups should also continue to support the economy. In order for these measures to be effective, the gov¬ernment must ensure this spend¬ing is disbursed as quickly and efficiently as possible.

Akkharaphol Chabchitrchaidol is a senior economist in the Bank of Thailand's Monetary Policy Department.