Global: From inflation to recession risk amid polarization
Global slowdown intensifies with recession risk; IMF slashes global growth forecast amid Ukraine war, high inflation, rising interest rates and slower China economy
Manufacturing growth in key countries slowed down despite easing supply disruption; recovery in services activity is losing momentum
US: Economic growth is cooling amid weaker domestic demand and unwinding of stimulus; strong job market eases recession fears and suggests further policy tightening
Cooling growth, softening inflation, and tightening financial conditions would slow rate-hike; we expect a 50bp hike in Sep and 25bp hike in Nov; rising risk of decoupling
Eurozone: Q2 boosted by easing covid restrictions but is on the brink of recession amid fading reopening tailwinds, weak demand, energy supply crunch, and drought impact
ECB might maintain current policy tightening pace as labor market remains tight and inflation continues to rise; PEPP purchases and TPI could ease fragmentation risk
China: Fading gains from reopening tailwinds amid rising covid cases and renewed restrictions in some cities; rising concerns over weak global prospects could curb exports
Rising risk in property sector threatens economic recovery; PBOC bucks global trends with surprise rate cut and we expect more policy supports to revive growth
Japan: Economic activity returns to pre-pandemic level; growth could lose momentum with higher number of covid cases, global economic slowdown, and rising prices
Pelosi’s visit to Taiwan has worsened US-China relations, raised tension in East Asia, and creates risk to global economy although China’s recent trade retaliation has limited impact
Trade decoupling would hurt China severely while the US will be hurt by financial decoupling, but decoupling could be gradual because of grave consequences on both
Escalating tensions over Taiwan add risks to many countries via trade, investment, services sector, and domestic production, depending on restrictions by the West and China
ASEAN countries are reliant on China both as a source of imported inputs as well as a destination for exports, while major disruptions to semiconductor production in Taiwan would severely disrupt the manufacturing industry in ASEAN, including Thailand.
Taiwan tension could have limited impact on Thai economy in the near-term; if tensions worsen, there will be greater impact on Thailand because of strong linkages with China
Taiwan and China tensions are spiking after China announced it would extend sea and air military drills over and around Taiwan until September. The Thai economy would be affected through the following channels:
(i) Supply chain linkage as Taiwan is the world’s largest IC manufacturer. Thailand’s IC imports from Taiwan accounted for almost 44% of total Thai imports from Taiwan and 54% of total Thai IC imports. This could hurt industries which had developed major production bases in Thailand such as electronic, electrical appliances, and automobile.
(ii) Investment flows. In 2021, Foreign Direct Investment (FDI) from Taiwan accounted for 3.3% of total FDI in Thailand. The BOI reported that in 1Q22, Taiwan investors accounted for the largest share of BOI applications for investment incentives by investment value, at THB 37.1 bn and 48% of total FDI applications to the BOI. The major FDI destination was auto production. For outward flows, Direct Investment from Thailand (TDI) to Taiwan was less than 1% share of total TDI.
(iii) Trade with Taiwan (Thailand’s 10th largest trading partner) faces higher transportation and logistics risks. In 2021, Thailand’s exports to Taiwan accounted for 1.7% of total Thai exports, led by electronic integrated circuits.
(iv) Tourism sectors as Taiwanese tourists accounted for 2% of total tourist arrivals in Thailand 2019 and 0.4% (or 8,060 persons) in 1H22. Given rising tensions, there could be fewer tourists from Taiwan.
This implies Taiwan tension would have limited impact on the Thai economy in the near-term. However, if tensions worsen and adversely affect the Chinese economy, there will be greater impact on Thailand because of strong linkages with China in terms of trade, supply chains, investment flows and tourism.
Thailand: Recovery driven by reopening, but still below pre-pandemic levels
- 2Q GDP growth is the strongest in a year, at +2.5% YoY, supported by accelerating consumption and recovering tourism activity, but growth was slightly slower than expected due to weaker exports and investment. We maintain our full-year growth forecast at 3.1% premised on a stronger recovery in tourism activity. However, upside could be capped by several headwinds created by the extended Russia-Ukraine crisis, weakening global demand as major countries tighten monetary policy, slower economic growth in China attributed to its zero-covid policy, and rising tensions between the US and China over Taiwan.
- Foreign tourist arrivals exceeded 1 mn in July after the government removes Thailand Pass requirement; at this rate, full-year arrivals may be better than expected.
- Exports saw double-digit growth in 1H22 at 12.7% but slowing global manufacturing activities might dampen Thai export growth the rest of this year. Manufacturing production saw zero growth and would remain slow given weaker external demand, shift in demand from goods to services, and high excess capacity.
- Private investment expanded slowly amid weak sentiment and higher production costs; recovering tourism activity helped to boost investment in service sector. Private consumption backed by additional government measures to help household cope with higher cost of living. High farm income and a mild improvement in employment might support consumption, but growth would be moderate due to high household debt and rising interest rates.
- Inflation edged down in July after hitting a 14-year high; cost-push pressures could be limited by falling global crude oil prices.
- We expect rate hikes to be gradual and slower than in neighboring countries mainly because of weaker recovery in Thailand relative to peers. For 2022 (based on consensus forecast), economic activity (or GDP) in Thailand will be 1.5% below pre-Covid level while peers are expected to register economic activity that is 2.1%-15.0% higher than pre-pandemic levels. Despite high inflation, the tentative signs of economic recovery suggest the Thai MPC would raise policy rate by 25 bps at the next meeting on 28 September to tame inflation expectations. The probability of another hike at the November meeting would increase if data show a stronger-than-expected recovery of the Thai economy.
Krungsri Research Forecasts for 2022
2Q22 GDP +2.5% YoY, slightly slower than our projection (+2.7%) amid slower exports and investment; we are keeping full-year growth at +3.1% amid stronger recovery in tourism
Major drivers for 2Q GDP were improving consumption and tourism spending; drop in manufacturing output dragged supply-side growth despite gains in agriculture and services
Tourism sector: Foreign tourist arrivals exceeded 1 mn in July after government removed Thailand Pass requirement; at this rate, full-year arrivals may beat expectations
Export sector: Signs of softer purchasing power in core economies; food security and ASEAN reopening are tailwinds for certain sectors
Exports saw double-digit growth in 1H22 at 12.7% but global manufacturing slowed down, which might dampen Thai export growth the rest of this year
1H22 export value beats expectations at 12.7% led by shipments to the US and ASEAN, supported by reopening of economic activity and implementation of RCEP with effect from January 2022. However, global production showed signs of slowing down. Global Manufacturing PMI fell to a 2-year low of 51.1 in July from 52.2 in June amid concerns over weaker global demand.
Manufacturing production saw zero growth and will remain muted given weaker external demand, a shift in demand from goods to services, and high excess capacity
Following signs of weaker external demand and a shift in demand from goods to services, manufacturing production index edged down 0.1% YoY in June. Capacity utilization rates in several manufacturing sectors are still below pre-Covid levels, including Chemicals, Automotive, HDD, Medical, Electrical Appliances. Capacity utilization rate in IC & Semiconductor and Machinery sectors are above pre-Covid levels. Despite rising domestic demand, manufacturing production is projected to recover gradually because of a slowdown in the global economy amid high inflation and ongoing supply disruption.
Private investment expands at a gradual pace amid weak sentiment and higher production costs; tourism recovery helps to boost investment in service sector
Private consumption backed by more government measures to address high cost of living
In June, private consumption index rose 8.9% YoY driven by (i) improving services expenditure as pandemic fears eased; and (ii) relaxation of control measures to boost tourist arrivals and domestic tourist activity. However, spending on durable goods fell due to weaker registered sale of passenger cars because chip shortage had delayed deliveries. In 2H22, still-high inflationary pressure would increase prices of consumer goods amid weak consumer confidence, which would dampen purchasing power. Recently, the government launched additional measures worth THB27.43 bn to support purchasing power in late-2022 (September-October). These measure would inject THB48.63 bn (+0.13% of GDP) into the economic system.
High farm income and mildly-better employment data would support consumption but growth would be moderate due to high household debt and rising interest rates
Farm income has risen sharply following a jump in farm prices and farm output. In June, farm income grew more than 18% YoY for the second consecutive month. Although unemployment rate improved to 1.4% in 2Q22 from 1.53% in 1Q22, it is still higher than pre-Covid (2019) level of 1%. In addition, the number of unemployed persons remain high at 0.55 million, albeit fewer than 0.61 million in 1Q22, but it is still above 0.39 million in 1Q20 (pre-pandemic level). Household debt was also high, close to 90% of GDP, and rising interest rates could affect debt repayment ability, which would cap consumer spending growth.
Inflation edged down in July after hitting a 14-year high; cost-push pressures could be limited by falling global crude oil prices
Thai MPC signals gradual rate hikes