Thai Economy Falls Into Recession in Q1

Recession, It's Official

The economy sank into recession in the three months through March as growth contracted for the second successive quarter. Official data released late yesterday showed that GDP in real terms shrank 7.1% from a year earlier. In the fourth quarter of 2009, the economy contracted 4.2% in annual terms.

Trade Balance Turns Positive

The Thai economy remains acutely exposed to the slump in global demand. Net exports have been the central driver of growth in recent years, accounting for around two-thirds of total GDP, as domestic demand has atrophied. In the fourth quarter of 2008, a dizzying collapse in exports dragged growth down. Now the initial export shock is reverberating through the economy, sapping momentum. Although exports continued to decline, falling 19.9% in the three months through March; the net trade balance moved into surplus as imports tumbled. Import growth has been defused by depressed commodity prices but the slide also reflects further reversals in domestic demand growth. Imports subsequently collapsed 38.8% in year-on-year (y/y) terms, pushing the overall trade balance into a 366.4-billion-baht (US$10.69-billion) surplus for the quarter. In the fourth quarter, the trade balance incurred a 3.5-billion-baht deficit.

Domestic Demand Emasculated

Domestic demand has been emasculated by protracted political uncertainty. Since 2006, private consumer spending and investment has recorded below-par growth with spiralling inflation in the first half of 2008 and concomitant hikes in interest rates further constricting momentum. Now tight credit conditions in the financial system and the deteriorating economic outlook have undermined private capital expenditure. Private capital expenditure shrank 15.8% in the March quarter following a revised contraction of 3.3% in the three months through December. Private investment tumbled 17.7% y/y with outlays on equipment falling 20.3%. Investment in construction contracted 8.2% as real estate demand withered and firms faced more bearish financial market conditions in raising finance for large-scale infrastructure projects. Producers also sought to cut back inventories, which fell by 156.2 billion baht. Inventories rose in the fourth quarter as firms were caught out by the speed and depth of the slump in external demand. Public investment fell 9.1% following a 10.2% contraction in the fourth quarter.

The slump in investment activity will add further weight on private consumer spending which recorded its first outright contraction since the first quarter of 1999. Household spending fell 2.6% y/y with the retrenchment proving broad based across all non-essential goods but particularly concentrated in big-ticket items. Growing job and income insecurity is negating the positive impact of declining inflation on household disposable income, while the polarised political environment still continues to generate uncertainty. Such prevailing negative influences have also served to offset the positive impact of direct fiscal stimulus measures under the government’s "Six Months-Five Measures" scheme, aimed directly at boosting disposable household income. Government consumption rose modestly in comparison to the 11.0% gain recorded in the fourth quarter, rising 2.6% y/y, reflecting the frontloading of budget allocations in the previous quarter to maximise the impact of counter-cyclical stimulus.

All Sectors Hit

The breakdown of growth in production terms further underscored the strains in the economy. Manufacturing output shrank 14.9% y/y in the three months through March as the full impact of collapsing exports slammed home. Attrition was particularly intense in the capital goods and technology sector where output tumbled 28.4% y/y. In the fourth quarter, the manufacturing sector contracted 6.7%. Construction activity declined 7.9%, despite the onset of major public works, while the hotel and restaurant sector continued to be undermined by the downturn in the industry globally and by the deterrent effect of domestic political volatility. Total tourist arrivals fell 15.7% on the year in the March quarter with the hotel occupancy rate plunging 54.0% in annual terms. Financial services also declined as transactions remained stymied by dysfunction in global financial markets. Agricultural production rose 3.5% following good weather but the sector was robbed of the impetus that soaring global food prices generated in the corresponding period of 2008.

Outlook and Implications