Several countries have launched measures to fight against both inflation and the consequences of the war in Ukraine, while these risks could squeeze global growth
Indicators are beginning to reflect the impact of Russia-Ukraine war; Global economy is expected to slow down. In March, Flash Composite PMIs for the US and Japan rose to 58.5 and 49.3, the 9-month and 3-month high respectively. Meanwhile, PMIs slipped in the Eurozone (54.5) and the UK (59.7), still beating market expectations. However, inflation tends to accelerate, with the March’s Tokyo Consumer Price Index edging up 1.3% YoY, the sharpest rise since 2019, and the February’s UK headline inflation reaching a 30-year high of 6.2%. Consumer sentiment has also slumped to an 11-year low of 59.7 in the US and to -18.7 in the Eurozone, its weakest in 11 months.
Improving indicators in major economies reflect the rebound in economic activity after the Omicron outbreak has subsided. However, the war in Ukraine has started to affect the economy, especially in Europe. Purchasing power is softening, as reflected in a drop in new export orders component of PMIs in Europe and Japan. Moreover, delivery time sub-indices in Japan, the UK, and the Eurozone has lengthened, indicating that supply chain disruptions are likely to take longer to disentangle than had been anticipated. We therefore expect that the impact of Ukraine crisis, the effect of strong inflation on purchasing power, and negative expectations for the economy will become increasingly evident in 2Q22.
Major economies are crafting responses to rising inflation and the Ukraine crisis amid monetary policy normalization. The Fed chair insists that the US labor market is very strong, but inflation is much too high. It may thus be necessary to tighten monetary policy by hiking rates by more than 0.25%. The Bank of England (BOE) also sees UK inflation touching 7.7% in 2Q22, almost four-times the target, and therefore signals a further rate hike.
The US and the EU have established a working group to deal with the consequences of the surge in energy prices that the Ukraine war has triggered and to cut dependency on Russian energy exports. The US and its allies will thus supply the EU with an additional 15bn cubic meters of natural gas by the end of this year, and the EU will increase its planned purchases of natural gas from the US by 50bn cubic meters annually. To counter the consequences of the war and to weaken the impacts of inflation, the EU has established a EUR 500m fund to support food security and to offset higher prices, while Japan has prepared a plan to stimulate its economy and to alleviate the consequences on consumers of higher oil and commodity prices, paying for this through both FY2021 budget reserves and FY2022 budget allocations.
As outbreaks ease, the major economies, especially the Western nations, are beginning to wind up monetary easing put in place to counter the impacts of COVID-19. Meanwhile, policies to mitigate impact of high inflation and the Ukraine crisis are now appearing. However, additional supplies of gas by the US and other countries to Europe will be insufficient to offset losses if Russia ceases exports to Europe (in 2021, the EU imported 155bn cubic meters of gas from Russia, or 45% of all EU’s gas imports). The effects of the war remain uncertain and will depend on the severity of war and following sanctions, as well as on impacts transmitted through: (i) disruption to trade and logistics; (ii) energy security; (iii) price & inflation; and (iv) income effect and capital markets. The world economy thus tends to expose escalating risks to inflation and growth.
The Ukraine crisis may undercut Thailand’s export and tourism sectors; The authorities are preparing short-term measures to ease cost of living burden
Although export and tourism sectors strengthened in February, the effects of Ukraine crisis may soon begin to be seen. In February, exports rose for the 12th month to generate receipts of USD 23.48bn (+16.2% YoY), compared to USD 21.26bn (+8.0%) in January, due mainly to economic recovery in trading partner markets. In addition, February’s foreign arrivals were recorded at 152,954 person, up from 133,903 person in January, with the most important originating nations being Russia, Germany, and France.
In January and February, Thailand’s external indicators showed positive signs in both exports and tourism sector. However, the situation may darken in the coming period as the effects of the Ukraine war, which erupted at the end of February, begin to be felt. The war will now likely extend into the 2Q22. The direct impacts on Thailand are likely to be limited by the fact that exports to Russia and Ukraine account for only 0.38% and 0.05% respectively of Thai exports. Nonetheless, the indirect impacts may be significant due to: (i) higher energy and commodity prices, which will then push up manufacturing and transport costs; (ii) Russia’s position as a major supplier of raw materials and thus the potential effect of Russian sanctions on a wide range of industrial supply chains; and (iii) the negative impacts of the war on incomes and economic growth globally, especially in Europe, which remains a major market for Thai exports and tourism. In our base case scenario, we thus see the Ukraine war cutting 3% from Thai exports, but the economy will also benefit from rising commodity prices. We thus anticipate growth in the value of exports dropping in dollar terms to 2.6% from the earlier prediction of 5.0% growth. Likewise, 2022 foreign arrivals are now predicted to total 5.5m, down from the prior forecast of 7.5m.
The government has agreed on a more than THB 80bn measures to alleviate rising energy prices; officials expect 3% GDP growth this year. The government has approved 10 new measures to help offset the rising cost of living (see accompanying table). These will run over 3 months from May to July and will carry a total price tag of THB 80.25bn, funded by: (i) THB 39.52bn in borrowing from the Oil Fuel Fund; (ii) THB 35.22bn in reduced contributions to the Social Security Fund; (iii) THB 3.74bn from the 2022 budget; and (iv) THB 1.76bn from PTT.
The government is putting short-term help in place to ease the rising cost of living of at least 40m people are expected to benefit. On the assumption that the Ukraine war lasts for 3 months, the authorities have outlined 3 possible scenarios relating rising oil prices to the domestic economy: (i) Dubai crude averages USD 100/bbl, and with diesel at THB 33/liter, inflation and GDP growth will run to 5.0% and 3.5%; (ii) Dubai crude averages USD 125/bbl, and with diesel at THB 40/liter, inflation and GDP growth will run to 6.2% and 3.2%; and (iii) Dubai crude averages USD 150/bbl, and with diesel at THB 46/liter, inflation and GDP growth will run to 7.2% and 3%. Krungsri Research has now cut our forecast for Thailand’s 2022 GDP growth to 2.8% from 3.7% based on the scenario that the war has extended into 2Q22, provoking stricter sanctions against Russia (though it should still be only non-energy sanctions).
