Economic recovery is slow, but it's still going

Economy April 07, 2015 01:00

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LAST YEAR, the economy continued to struggle from the effect of the political crisis.



Gross domestic product barely budged by 0.7 per cent. The decline in exports and delay in fiscal stimulus were heavy drags on the recovery in the second half.
This and next year, the economy is expected to keep rebounding, but not as fast as anticipated. Based on the National Institute of Development Administration’s macro-econometric model, we forecast GDP growth at 3.8 per cent this year and 3.6 per cent next year. 
That would bring the average growth rate of 2014-16 to 2.7 per cent, which is similar to 2.9 per cent after the global financial crisis from 2008-13.
Considering domestic demand, I expect private consumption to increase by 2.9 per cent this year and investment by 6.4 per cent. Despite the decline in exports in January and February, I still anticipate that exports for the whole year will increase by 2.8 per cent. 
Including tourism revenue and other services, export value will increase 4.6 per cent, so we cannot rely on the export sector as the engine of growth in the near future. This is because of the slower growth in the world economy after the global financial crisis. 
Even though our economy is expected to revive this year, the recovery process is different from 2010 (7.8 per cent) and 2012 (6.5 per cent) when the economy picked up strongly after the devastating effects of the global financial crisis in 2008-09 and major flooding in 2011. 
Next, considering the role of fiscal policy, we expect public consumption to expand 4 per cent this year and investment 12 per cent. This assumes that government expenditures will increase as planned. 
However, because of fiscal space and limits on government deficit and debt, state expenditures cannot keep increasing at this high velocity. 
The only bright spot for the economy this year is the decline in world crude-oil prices. As with other oil-importing countries, the crash in oil prices since the end of last year has made Thai inflation drop quickly. Headline inflation was negative in the first quarter of 2015 and we predict that in the first half, headline inflation will continue to decline by 0.6 per cent. 
Even though inflation is expected to rise marginally in the second half, our headline-inflation forecast for 2015 is 0.0 per cent. 
Monetary policy can be used to accommodate the dimming growth outlook. The Bank of Thailand cut the policy interest rate to 1.75 per cent last month. Based on the monetary-policy rule in NIDA’s macro-econometric model, we expect the BOT’s Monetary Policy Committee to continue lowering the rate to 1.25 or 1.50 per cent later this year. 
The looser monetary policy is the important factor supporting weak domestic demand and allowing the baht to fall to improve short-run export competitiveness. This factor is important when global demand is still soft.
In summary, the economy is expected to rebound in 2015. However, the speed of recovery will be slower than anticipated in both 2015 and 2016. These forecasts lead to more important questions about the long-term growth potential of Thailand. 
After the Asian financial crisis and important structural reform, average GDP growth from 2000-07 was 5.1 per cent. 
Based on recent BOT research, current potential GDP growth is about 3.3 per cent without a significant boost in the investment-per-GDP ratio, and 4.5 per cent if the government can implement the plan for Bt2 trillion worth of investment projects. 
The important role of government investment is not only to provide short-run stimulus when global and domestic demand is weak, but also to improve the long-term growth potential of Thailand.
 
Yuthana Sethapramote, Graduate School of Development Economics at the National Institute of Development Administration, can be reached at yuthana.s@nida.ac.th.