In 2023, Thai economy undershot its growth potential with the political environment uncertain through much of the year.
The Thai economy is estimated to have grown by 2.5% in 2023, down fractionally from 2022’s 2.6%. Improvements were driven by the strength of the service sector, particularly the rise in both domestic tourist numbers and foreign arrivals, which then helped to return labor markets and incomes to their pre-Covid levels of health. However, the political system went through a period of transition in the year, and delays to establishing a new government following the general election undercut business sentiment and postponed budget disbursements. Alongside this, the slowdown in the global economy, the rise in interest rates to their highest in several decades, the continuation of the war in Ukraine, and the eruption of fighting between Israel and Hamas all added to the headwinds blowing against Thailand’s economy and financial sector.
The continuing rebound in the tourism sector proved to be a major engine of growth in the year. Overall, foreign arrivals grew solidly following an end to Covid-19 as a global health emergency and the reopening of the country. Although recovery in the all-important Chinese market has been slower than hoped, the tourism sector received a year-end boost with the temporary introduction of visa-free travel for arrivals from certain high-potential countries. Given this, for all of 2023, overseas arrivals are expected to reach 27.7 million, over double the 2022 total of 11.2 million. Private consumption was another bright spot for the economy, with this forecast to have grown 7.1% on the boost given to spending by the reopening of the country and the improving outlook for both the domestic and international segments of the tourism sector, the positive effects of which have now returned employment to close to its pre-pandemic level. Another tailwind included government measures to help reduce the cost of living, particularly energy costs.
Less positively, Thai exports have been hurt by the slowdown in global economy and trade, which have themselves been the consequence of ongoing geopolitical tensions and tight monetary policy. This has then dragged on demand in export markets. Although Thai exports returned to growth in the latter half of the year, export value for all of 2023 is expected to have contracted by -1.5%, a turnaround from the 5.4% growth recorded in 2022. Private investment growth is estimated to have decelerated to 2.0% in 2023 from 5.1% in 2022, partly due to the slowdown in exports and resulting weakness in manufacturing. Investments were also affected by delays to installing a new government following the general election, which caused businesses to hold off on investment decisions until there was greater clarity over what direction the new administration’s policy would take. The mid-year hiatus in central government activity further impacted public spending since this delayed the passing of the annual budget for the fiscal year 2024, which should have started disbursement in October 2023. Thus, parts of budget disbursements and the government’s new investment projects have been deferred until 2024, and combined with the drop off in expenditure on Covid-19 related health measures, this has impacted the overall economic growth.
Boosted by the post-pandemic rebound in domestic expenditure, inflationary pressures remained strong at the start of 2023, but headline inflation cooled rapidly before turning negative in the final quarter of the year. Government measures to help lessen the costs of living, particularly electricity and fuel prices, played an important role in this. For all of 2023, inflation is thus expected to average 1.3%, down dramatically from 2022’s 6.1%. Tighter monetary policy also helped to ease inflationary pressure. The Monetary Policy Committee (MPC) has hiked the policy interest rate 5 times from 1.25% at end-2022 to 2.50% at end-2023 as the Bank of Thailand looked to maintain price stability and to pull inflation back into its target range in the medium term. On the international front, exchange rates remained volatile, and the Thai baht-US dollar rate was periodically buffeted by the US central bank’s tightening of monetary policy by hiking the Fed Funds rate to a 22-year high. However, expectations of major economies’ sooner-than-expected rate cuts in 2024 helped the baht to rally in late 2023. The baht was also helped by the continuing strength of the Thai tourism sector and the expectation that this will help to push the current account balance back into surplus.
2024 Outlook: Lagged cyclical recovery with uneven and uncertain growth
The Thai economy should enjoy an improving outlook, and growth is expected to accelerate to 3.4% from an estimated 2.5% in 2023, largely thanks to internal factors that will include the following. (i) Government supportive measures and greater capacity will support ongoing growth in the tourism sector. Foreign arrivals will thus increase from 27.7 million in 2023 to an anticipated 35.6 million in 2024, although this will still be short of the pre-pandemic total of around 40 million. (ii) Private consumption is expected to grow by 3.3% on recovery in the tourism sector, firmer labor markets, the rise in the minimum wage, and continuing government stimulus measures and help with the cost of living. (iii) With the passing of the THB 3.48 trillion annual budget (a 9.3% increase from last year’s), public spending will become a more important driver of growth from Q2 onwards. In particular, having contracted in 2023, public consumption and investment are forecast to return to growth of respectively 1.5% and 3.0%. (iv) Private investment should expand by 3.5% given the strength of the service sector and infrastructure-related businesses, coupled with ongoing government measures to support the growth of targeted industries.
However, export growth will be limited by continuing weakness in overseas markets. The International Monetary Fund sees the world economy expanding by 2.9% in 2024, down fractionally from 2023’s 3.0% and significantly below the 3.8% averaged over 2000 to 2019. Nevertheless, although the global economy may remain sluggish, the World Trade Organization expects that growth in the volume of world trade will improve from 0.8% in 2023 to 3.2% in 2024. Other specific factors that will have a positive impact on trade will include cyclical recovery in the electronics industry, efforts to shore up food security, and growing regionalization, and overall, these factors should help the Thai exports pick up to growth of 2.5% in 2024.
The continuing recovery in domestic economic activity and a potential increase in production costs, including the minimum wage hike, will add to price pressures, and average inflation is therefore expected to rise from 1.3% in 2023 to 2.0% in 2024. In response, the Monetary Policy Committee will likely hold its policy rate steady at 2.50% through 2024 as the authorities balance the desire to keep inflation within the target range with the need to support a return to the country’s long-term growth trajectory. With future risk substantial, the authorities will also be keen to maintain the policy space needed to meet potential challenges.
The IMF sees the ASEAN-5 enjoying average growth of 4.5% in 2024, up from 4.2% in 2023, and so while Thailand can look forward to an improving outlook in 2024, the country continues to underperform relative to its regional peers. Through 2024, internal factors that may drag on growth will include the high level of household debt, problems with which are being amplified by the increase in interest rates, the potentially worsening impacts of drought, and longer-term structural problems such as the aging of society, labor shortages, and declining competitiveness in many industries. Externally, risk may arise from the potential impacts on the world’s major economies of interest rates that are at a multi-decade-high, slowdown in the Chinese economy and the country’s lingering real estate crisis, fragmented globalization and the potential bifurcation of the world economy, and ongoing geopolitical stresses, which unfortunately have the potential to intensify and widen in the coming period.
