recent economic developments - bank of thailand policy...to cambodia, laos, myanmar, and vietnam...

Recent Economic Developments

Monetary Policy Report March 2016 24

2. Recent Economic Developments

2.1 The global economy

With regard to advanced economies, the

drag from the slowdown in emerging market

economies turned out greater than previously

assessed owing to a decline in export activities

(Chart 2.1 and 2.2). However, domestic demand

continued to be a main driver to support economic

recovery going forward.

The U.S. economy continued to

expand, albeit at a slower pace at 1 percent

The global economy continued to show signs of recovery. Nevertheless, forward

growth momentum was likely to moderate for both advanced and Asian economies. For

advanced economies, the impacts from the slowdown in emerging market economies turned

out greater than previously assessed primarily because of a drag in exports. However,

domestic demand continued to be a main driver sustaining economic recovery going forward.

For Asian economies, headwinds to growth came from both cyclical and structural problems.

Cyclical problems were related to a delayed global recovery. Structural problems, which were

attributable to a changing global trade structure and domestic structural constraints, weighed

on growth more than previously anticipated.

The Thai economy showed signs of weakening in various sectors more evidently. The

repercussions of the contraction in exports on overall economic activities were increasing.

Private consumption slowed down after the effects of temporary boosts started to wane.

Private investment, especially in the manufacturing sector, remained subdued, despite

improvements seen in some services sectors such as telecommunications. Nonetheless,

public investment and tourism continued to play a crucial role in sustaining the economy.

Disbursement of government funds was on course, and there were indications of a rebound in

the number of tourists from increasingly more countries, which would provide further support to

the expansion in tourism-related services industries.

Regarding costs and prices, headline inflation remained negative given that global oil

prices were still at low levels. Core inflation edged down on account of weaker domestic

demand and subdued cost pressures.

Source: Bureau of Economic Analysis, Eurostat, Cabinet Office of Japan

-1.0

-0.5

0.0

0.5

1.0

1.5

-4

-2

0

2

4

6

Q1 2

015

Q2 2

015

Q3 2

015

Q4 2

015

Q1 2

015

Q2 2

015

Q3 2

015

Q4 2

015

Q1 2

015

Q2 2

015

Q3 2

015

Q4 2

015

U.S. Euro area Japan

Private consumption Private investment Public expenditure Net exports Inventory GDP, annualizedGDP (RHS)

Chart 2.1 Sources of GDP growth of G3 economies(percent change from same quarter last year)

Percent(annualized, seasonally adjusted)

Percent(seasonally adjusted) (RHS)


(qoq saar) in the fourth quarter of 2015,1/ down

from 2.0 percent in the previous quarter. Three

factors contributed to the slowdown were (1) a

significant moderation in investment following the

contraction in investment in the energy sector that

were adversely affected by persistently low oil

prices; (2) a continued decline in inventories from

elevated levels in the first half of the year; and (3)

shrinking net exports due to weakening demand

from abroad in combination with a stronger U.S.

dollar.

Nonetheless, recent economic data

indicated a continued recovery, driven primarily by

domestic demand. In particular, private

consumption was underpinned by rising incomes

and continuing improvement in the labor market,

as reflected in the improvement in retail sales.

However, the speed of the U.S. recovery would

likely be more sluggish than previously expected

on the back of the slowdown in the global

economy, especially emerging markets, which

continued to weigh on U.S. exports. Given

weakening exports and heightened volatility in the

U.S. financial markets, the pace of the federal

funds rate increases would likely be to more

gradual than assessed in the previous Monetary

Policy Report.

The euro area economies2/

grew by 0.3

percent (qoq sa) in the fourth quarter of 2015, a

rate unchanged from the previous quarter.

Growth was primarily supported by continued

1/

Economic data reported in this Monetary Policy Report

were based on the official data which had been

released up to March 22, 2016, the day before the

March MPC meeting. The figure for the fourth quarter

U.S. GDP growth reported above was the second

estimate.

2/ Comprising 19 countries using the single currency

-15

-10

-5

0

5

10

15

20

25

30

35

2010 2012 2014 2010 2012 2014 2010 2012 2014

Emerging Market Asia Emerging Market Europe

Emerging Market Latin America Other Emerging Markets

Advanced Economies Total

Source: Trademap

Chart 2 G3 exports classified by destination

Percent (annual growth)

U.S. Euro Area Japan


expansion in domestic demand, in particular private

investment and public consumption. In contrast,

private consumption moderated due to a dent in

consumer confidence, in part because of the Paris

terror attack in November 2015. Furthermore,

latest data pointed to increased tightening in

financial conditions following the recent European

financial market volatility. Although this would

further weigh on private consumption, both

subdued oil prices and gains in employment could

somewhat offset the negative impacts. Meanwhile,

weak exports remained a drag on growth.

Going forward, despite the supports from

an improving labor market, low oil prices, and

accommodative monetary policy, a few adverse

risks were present. One risk would be related to

banking sector fragility, especially in the periphery

with elevated nonperforming loans and financial

sector links to emerging markets and oil industries.

The other risk would be related to the negative

interest rate policy adopted by the European

Central Bank that could adversely affect profitability

of commercial banks. These negative risk factors

could create greater financial market volatility and

tightening financial conditions that would partly

restrain the support from monetary policy

accommodation. Furthermore, uncertainties in

connection with geopolitical risks and prolonged

political tensions could disrupt the recovery of the

euro area and the global economy. The Committee

therefore would closely monitor these risks which

could have implications for the conduct of monetary

policy in Thailand going forward.

The Japanese economy contracted by

0.3 percent (qoq sa) in the fourth quarter of

2015, down from a 0.3 percent growth rate

registered in the previous quarter due to a

sharp drop in private consumption. The


contraction in consumer spending was partly

attributable to (1) temporary factors such as

warmer-than-usual weather that caused a fall in

winter clothing sales and energy consumption and

(2) the elevated level of consumption in the

previous quarter. Preliminary data for the first

quarter of 2016 indicated a decline in consumer

confidence and retail sales, which reflected

adverse effects from volatility in the global

financial market and declines in the prices of

financial assets. Incidentally, private investment

continued to expand in the fourth quarter.

Going forward, the Japanese economy

would likely recover gradually, supported by a

healthy labor market, household incomes, and

strong corporate profits. However, notable risks to

Japan were considered to be (1) a slowdown in

external demand that could restrain exports and

(2) a more-than-expected prolong of global

financial market volatility that could hurt domestic

demand through a decline in confidence.

The Chinese economy moderated on

account of shrinking exports and weakened

private consumption and also a slowdown in

activities in the financial sector after the recent

volatility. Consequently, the Chinese authority

rolled out further stimulus measures to support the

economy.

The Chinese economy expanded at a

rate of 6.8 percent (yoy) in the fourth quarter of

2015, slightly down from 6.9 percent in the

previous quarter on account of the moderation in

the services industries that was attributed to the

slowdown in financial sector activities.

Nonetheless, latest indicators pointed to a further

moderation in the economy (Chart 2.3) due to

weakening consumption and shrinking exports,

despite investment that expanded slightly thanks

Chart 2.3 China’s economic indicators

(percent change from same month last year)

Source: CEIC

Percent


to monetary policy accommodation, real estate

stimulus measures, and public investment.

Meanwhile, manufacturing production would likely

moderate because of falling external and domestic

demand and policies to reduce excess capacity

despite the continued expansion in services

industries.

Given the prospect of an economic

slowdown and liquidity tightening, the Chinese

administration continued to announce stimulus

measures to sustain the economy to achieve this

year’s growth target of 6.5-7.0 percent. These

measures included an increase in the frequency of

open market operations, a cut in the reserve

requirement ratio, and real estate stimulus

measures, namely an easing of mortgage down

payment requirements and a reduction in

transaction taxes for some home buyers.

Asian economies were adversely affected

by both cyclical factors that delayed the global

recovery and structural factors, namely a change

in the global trade structure and domestic

structural constraints, that weighed on economic

growth more than previously expected.

Several Asian economies (excluding

China and Japan) grew at a slower pace (Chart

2.4) due primarily to weakening domestic demand

and greater contraction in exports (Chart 2.5).

Exports of Asian economies were increasingly

affected not only by the global economic

slowdown, attributed especially to emerging

market economies, but also by structural

challenges related to both country-specific

constraints and slower trade because of a change

in the global trade structure.

Weakening exports adversely affected

domestic demand in most Asian countries, as

reflected in lower employment and incomes.

2.4 2.9

2.2

1.9

4.0

0.6

-0.8

-0.5

2.5

2.2 2.7 3.0

5.6

4.9

4.7

4.5

2.7

1.7 1.8

1.8

4.7

4.7

4.7 5.0

5.0 5

.8 6.1 6.3

3.0

2.7 2.9

2.8

-2

3

8

Q1

20

15

Q2

20

15

Q3

20

15

Q4

20

15

Q1

20

15

Q2

20

15

Q3

20

15

Q4

20

15

Q1

20

15

Q2

20

15

Q3

20

15

Q4

20

15

Q1

20

15

Q2

20

15

Q3

20

15

Q4

20

15

Q1

20

15

Q2

20

15

Q3

20

15

Q4

20

15

Q1

20

15

Q2

20

15

Q3

20

15

Q4

20

15

Q1

20

15

Q2

20

15

Q3

20

15

Q4

20

15

Q1

20

15

Q2

20

15

Q3

20

15

Q4

20

15

Hong Kong TaiwanSouth KoreaMalaysia SingaporeIndonesiaPhillipines Thailand

Percent

Chart 2.4 GDP growth of Asian economies

(change from same quarter last year)

Source: CEIC


Latest data indicated that Asian economies would

continue to slow as reflected in the Purchasing

Managers Index (PMI) and its new export orders

component of many countries remaining below 50.

Going forward, Asian economies

(excluding China and Japan) would likely grow at

a slower pace because of the softening in exports

and domestic demand and because of domestic

structural constraints such as heavy dependence

on commodity exports, labor market problems,

and population aging.

2.2 The domestic economy

Economic momentum showed visible

signs of losing steam in several sectors, as export

contraction started to increasingly impact the real

economy while the positive effects from temporary

factors started to wane. However, public

investment and tourism remained key drivers in

sustaining economic momentum (Chart 2.6).

Exports continued to contract in both quantity and

value terms as cyclical and structural challenges

increasingly weighed on Thai exports.

Adverse cyclical factors in the global

economy led to greater negative impacts on

exports of several countries, including Thai

exports. Especially after the effects of temporary

economic boosts began to fade, these negative

impacts became more evident, as reflected in a

slowdown in exports of some product categories,

such as automobiles and electronic parts for new

mobile phones and tablets which had previously

accelerated following product launches. Overall,

Thai exports to most destinations declined, except

to Cambodia, Laos, Myanmar, and Vietnam

Chart 2.5 Contribution to Asia exports

classified by destination

Source: CEIC

Percent (annual growth)

Note: Asia includes Hong Kong, Taiwan, South Korea, Malaysia, Singapore,

the Philippines, and Thailand

-1.0

0.0

1.0

2.0

3.0

4.0

Q1 2014 Q3 2014 Q1 2015 Q3 2015

seasonally adjusted, percent change from last quarter

percent change from same period last year

Chart 2.6 GDP growth1/

(seasonally adjusted, percent change from last quarter)

Note: 1/ Calculation based on chain volume measure (CVM)

Source: Office of the National Economic and Social Development Board

Percent


(CLMV) which continued to expand (Chart 2.7). In

addition to affecting the volume of exports, the

global economic slowdown continued to weigh on

oil and other commodity prices. As a result, prices

of exports associated with oil and commodities, for

example, petroleum, petrochemicals, chemicals,

and rubber and rubber products, contracted

sharply.

Apart from cyclical factors, structural

problems increasingly weighed on Thai

exports and would likely remain a drag for the

foreseeable future. Structural problems could be

classified into two categories as detailed below.

(1) Shifts in the global trade structure

led to a decline in imports of goods and raw

materials from abroad. First, the Chinese

administration’s emphasis on the importance of

the domestic contents of exports in accordance

with its economic reform policy increasingly

affected other trading partners, especially ASEAN

countries which were linked to China's production

chain. Second, intraregional trade in the European

Union was on the rise. Third, the U.S. now

increasingly relied on imports from Mexico instead

of China and Asia. As a result, these shifts in the

global trade structure would continue to weigh on

Thai exports.

(2) Domestic structural problems, such

those related to labor and manufacturing

technology, continued to limit competitiveness in

production and exports. Examples included

technological limitations in the production of solid

state drives that were to replace hard disk drives,

the latter of which faced a continuous decline in

demand. Moreover, Thailand’s loss of the

Generalized Scheme of Preferences (GSP)

privileges since the beginning of 2015 would affect

Jul

Jan

Jul

Jan

Jul

Jan

Asean- Middle East ( Australia (

G China ( . ) (RHS) CLMV ( . ) (RHS)

Chart 2.7 Thai exports by destination

Note: ( ) Export share in 2015

Sources: Customs Department and Bank of Thailand

(3-month moving average July 2013 = 100)

Index Index


exports of clothing and processed agriculture

products to the European Union.

The continuous contraction in exports increasingly

affected the real economy as a whole. Moreover,

with the effects of the temporary economic boosts

started to wane, growth momentum in many

sectors, especially consumption and private

investment, became weaker.

Private consumption showed signs of

moderation after the effects of temporary

economic boosts from stimulus measures

started to fade. In addition, consumers remained

cautious in spending because of concerns about

elevated household debt, together with subdued

farm incomes that were caused by low commodity

prices and China’s economic slowdown Going

forward, low input costs from oil prices and

improving consumer confidence (Chart 2.8) would

work to support consumption. Furthermore, labor

migration out of the agricultural sector, where

income tended to be subdued, into higher-pay

sectors would partly support growth of private

consumption going forward, especially in the

necessity goods category (Box: The Resilience of

Private Consumption in Thailand).

Private investment, especially in the

manufacturing sector, remained subdued. A

combination of shrinking exports, weak domestic

demand, and excess production capacity (Chart

2.9) obviated the need for investment to expand

production capacity. In addition, foreign direct

investment into Thailand’s manufacturing sector

tended to fall relative to the past (Chart 2.10),

particularly in businesses related to electrical

appliances, rubber, and plastic. Nevertheless,

investment in services industries, especially

those benefiting from government policies,

improved to some extent. Examples included (1)

Note: Shares of survey responses are 76.2% being non-agricultural,

11.1% being agricultural, and 12.7% being unemployed/studying.

Source: Ministry of Commerce

Chart 2.8 Consumer Confidence Index

Index

Million USD

Source: Bank of Thailand

Chart 2.10 Foreign direct investment

and Thai direct investment

-12

-8

-4

0

4

8

All groups Exports < 30% Exports 30% - 60% Exports > 60%

Quarter 3 Quarter 4

Note: Difference between current capacity utilization and the average during

2011-2013, excluding period with severe flooding (Oct 2011 – Jan 2012)

Source: Calculations by Bank of Thailand

Chart Capacity utilization in 2015

Percent

(Excess Capacity)


capital investment in telecommunications to

support the operation of the 4G mobile network

services at the beginning of 2016 and (2)

alternative energy investment that was in line with

government policy and was intended to support

the increased energy need due to growing

urbanization.

Public spending and tourism remained key to

sustain economic momentum.

Public spending, both current and investment

expenditures, continued to be an important

driver of growth (Chart 2.11). With the

improvement in budget spending efficiency,

disbursement of outlays for regular public

investment and for projects under the

government’s phase-2 and phase-3 economic

stimulus packages were quickly executed.

Meanwhile, disbursement of loans for water

resource management and road transportation

projects progressed as scheduled. In addition, the

government also issued additional stimulus

measures during year-end, including the tax

deduction measure, whereby taxpayers were

allowed to claim an income tax deduction by the

amount spent on goods and services up to 15,000

baht, that was aimed at supporting consumer

spending and bolstering business confidence.

Tourism began to show signs of

rebound, as reflected in the number of tourists

from various countries, and turned out to be a

major driver of related services industries such

as the wholesale-retail and transportation

sectors. Tourism income continued to improve

primarily on the back of the increase in Chinese

tourists. Despite China’s slowdown and yuan

depreciation, expansion of low-cost airline routes to

Thailand, together with Thailand’s popularity as a

travel destination, contributed to the surge in

Chart 2.11 Public spending

Current expenditure excluding central government transfers

Investment expenditure excluding central government transfers

Billion baht

Billio baht

Source: Bureau of Budget; Fiscal Policy Office


Chinese tourists. Moreover, the number of European

tourists rebounded, partly because of an expansion

of low-cost airline routes to Thailand. In addition, the

number of tourists from commodity-exporting

countries, such as Australia, Russia, Indonesia, and

Malaysia, also ticked up, although these countries

were affected by subdued commodity prices (Chart

2.12). Going forward, tourism was expected to

expand solidly given continuing support from low

transportation expenses in line with oil prices and

from the increases in the number of low-cost airline

routes to Thailand.

Service industries would play a more significant

role in the Thai economy going forward.

Services industries grew strongly in all

sectors (Chart 2.13) due mainly to the

improvement in the tourism outlook and overall

domestic demand that continued to expand.

Moreover, services industries associated with the

real estate sector benefited from the government’s

stimulus measures at the end of 2015.3/ These

measures helped increase the number of

transactions and transfers of residential units, in

particular low-rise properties that typically

commanded higher prices than condominiums,

and bolstered confidence among property

developers by reducing some oversupply in the

market.

3/

The real estate stimulus measures included (1) income

tax deduction for first-time home buyers effective from

October 13, 2015; (2) loans with a credit line of up to 3

million baht provided by the Government Housing Bank

for low- and middle-income households effective from

October 19, 2015; and (3) a reduction in transfer and

registration fees from 2 percent and 1 percent,

respectively, to 0.01 percent effective from October 29,

2015.

4.14.5

8.1

18.0

3.72.2

9.7

22.1

4.13.1

6.7

12.7

5.56.6

5.3 5.0

0

5

10

15

20

25

Trade Real estate Transporation and

telecommunications

Hotels and

restaurants

Q1 2015 Q2 2015 Q3 2015 Q4 2015

Chart 2.13 Growth of services industries

Source : The National Economic and Social Development Board

Percent

80

120

160

200

240

50

75

100

125

150

Jan

2013

Jul Jan

2014

Jul Jan

2015

Jul Jan

2016

Europe (excluded Rusia)JapanOil-exporting countries

Chart 2.12 Index of foreign tourists classified by nationality

3-month moving average, seasonally adjusted; January 2013

Note: Oil-exporting countries are Australia, Russia, Indonesia, and Malaysia,

which account for 20% of total foreign tourists

Source: Department of Tourism

Index Index


Going forward, services industries would

play a crucial role in driving the economy, given

that the manufacturing sector was likely to

moderate following the slowdown in exports.

Moreover, investment in services industries was

expected to grow, which would boost total factor

productivity in line with rising productivity in

modern services sectors, such as transportation,

telecommunications, and financial intermediation,

which displayed largest gains in productivity per

person than other sectors (Chart 2.14). Services

industries also played a part in absorbing labor

migration out of the agricultural and manufacturing

sectors, as tourism-related sectors continued to

show strong growth and required only minimal

labor skills (Chart 2.15). Services industries would

therefore be pivotal in supporting the economy at

this current juncture and would be a key driver

propelling the Thai economy in the future.

2.3 Production cost and price conditions

Headline inflation remained negative given

that global oil prices were still at low levels, while

core inflation edged down on account of subdued

cost pressures and weaker domestic demand.

While the Committee anticipated a rise in headline

inflation, which would depend crucially on future

oil price developments, it would monitor domestic

demand recovery and inflation expectations

closely going forward.

Headline inflation remained negative at the

beginning of 2016, with the average for the first

two months being -0.52 percent. Consumer price

inflation was still restrained by subdued domestic

energy prices and global oil prices (Chart 2.16).

The low crude prices were attributed to (1) an

Chart Labor productivity

Source: National Economic and Social Development Board; Bank of Thailand

Index (base year 2013 )

Chart 2.15 Number of employees classified by sector

Index (3-month moving average, January 2013 = 100)


Chart 2.16 Contribution to headline inflation

Source: Bureau of Trade and Economic Indices, Ministry of Commerce;

calculations by Bank of Thailand

Percent

2016 Q1:

Jan–Feb


increase in oil production by the Organization of

the Petroleum Exporting Countries (OPEC), in

particular from Iran after the sanctions were lifted

and (2) the drop in oil demand on the back of the

slowdown of the global economy, in particular

China. Nonetheless, headline inflation was on

course to become less negative thanks to the

dissipation of the base effect and the increases in

fresh food prices, the latter of which were due to

drought in some parts of the country that caused

prices of vegetables and fruits to edge higher.

Core inflation for the first two months of

2016 averaged at 0.63 percent, slightly edging

lower on the back of a weakening domestic

economy and subdued cost pressures. While an

increase in the excise taxes for tobacco products

and automobiles pushed up inflation somewhat, it

failed to fully offset the impacts of sluggish

demand. Indicators of underlying inflation all

showed steady downward trends (Chart 2.17).4/

Given the fall in energy prices in tandem

with crude prices, production costs of goods and

services in the core consumer price basket also

declined, as reflected in the decreases in prices of

core consumer price goods for which oil was a

4/

For the legend in Chart 2.17, the number in the brackets on

the left is displayed in terms of %MoM (sa, 3mma) as of

February 2016, while the number on the right is the long-

term average over 2005-2014. Core inflation ex rent &

government measures excludes (1) rent, which displays

high persistence, and (2) changes in prices resulting

from government measures and taxes. Asymmetric trim

excludes goods and services with most volatile price

changes, removing from the distribution of price

changes the bottom 7 percentile and the top 5

percentile, in order to obtain an inflation trend. Principal

component model calculates changes in the common

statistical factor that drives price movements across

categories of goods and services.

-0.1

0.0

0.1

0.2

0.3

0.4

0.5

Jan

2012

Jul Jan

2013

Jul Jan

2014

Jul Jan

2015

Jul Jan

2016

Core inflation ex rent & government measures (-0.03, 0.17)

Asymmetric trim (-0.01, 0.25)

Principal component model (-0.03, 0.12)

Percent change from previous month

(3-month moving average, seasonally adjusted)

See footnote 4 for details of each indicator.

Chart 2.17 Underlying inflation indicators

Sources: Bureau of Trade and Economic Indices, Ministry of Commerce,


Chart 2.18 Oil-related core inflation measurePercent (yoy)

Note: Calculated using weights based on the information in the 2010 Input-

Output Table. See footnote 5 for details.

Source: Bureau of Trade and Economic Indices, Ministry of Commerce,


Nonoil-related core inflation measure

Oil-related core inflation measure


production input5/ (Chart 2.18). Meanwhile,

subdued domestic demand also played a role in

lowering the prices of goods for which oil was not

an input. In addition, businesses found it difficult to

raise prices, as reflected in the proportion of

goods in the core consumer price basket, whose

prices had been raised over the past two years,

was on a declining trend (Chart 2.19).

Although inflation expectations edged

up slightly in line with recent developments in

global crude prices, they remained on a

downward trend. One-year-ahead inflation

expectations according to surveys of professional

economists and businesses respectively stood at

2.2 percent and 1.95 percent as of March 2016.

Meanwhile, medium-term inflation expectations

remained near the inflation target despite having

edged down somewhat (Chart 2.20). Looking

ahead, the Committee would continue to monitor

the recovery of domestic demand and

developments of inflation expectations closely.

5/

Two measures of core inflation, one measure with oil

used as a direct or indirect input for each item in the

core CPI basket and the other measure consisting of

goods unrelated to oil, are calculated by assigning

weights based on the information in the 2010 Input-

Output Table.

0

2

4

6

8

Jan

2007

Jan

2008

Jan

2009

Jan

2010

Jan

2011

Jan

2012

Jan

2013

Jan

2014

Jan

2015

Jan

2016

Inflation expectations by firms (1-year ahead)

Inflation expectations by professional economists (1-year ahead)

Inflation expectations by professional economists (5-year ahead)

Inflation expectations based on model (5-year ahead)

Chart Inflation expectations

Percent change from same period last year

Sources: Business Sentiment Survey of Bank of Thailand, Consensus

Forecast, and calculations based on macro-finance term structure model

Chart 2. Shares of items with different degrees of price adjustments in core CPI basket

Note: Calculated from %MoM change according to weight in core CPI basket

Source: Ministry of Commerce, calculations by Bank of Thailand

Percent


Table 2.1 Quarterly inflation

Unit : Percent 2014

2015 2016

Q1 Q2 Q3 Q4 Jan-Feb

Percentage change from previous year (%ryoy)

- Headline Consumer Price Index 1.89 - - - -0.86 - 52

Core Consumer Price Index 1.59 0.85 0.63

Raw food 3.46 - 1.45 1.62

Energy 1.68 - - - -14.63 -11.50

Percent change from previous quarter (%rqoq_sa)

- Headline Consumer Price Index - - - 0.1 -

Core Consumer Price Index - 0.2 -

Raw food - - -

Energy - - - - - -

Source: Bureau of Trade and Economic Indices, Ministry of Commerce.

Calculations of percentage change from last quarter, seasonally adjusted,

by Bank of Thailand

38 Monetary Policy Report March 2016

The resilience of private consumption in Thailand

The resilience of private consumption is a critical issue in the assessment of the

economic outlook. This is particularly relevant at the current juncture, where exports are not

able to act as the main growth driver as in the past due to both cyclical and structural

headwinds, and private investment remained subdued. Given such context, Thailand’s growth

momentum therefore depends critically on public and private consumption, as reflected in

their contribution to economic growth (Chart 1).

In assessing the strength of private consumption going forward, both negative and

positive factors driving consumption are considered as follows. Private consumption was

weighed down by several factors last year. First, merchandise exports contracted by 3.4

percent in 2015 from a year earlier due to a slowdown in trading partners’ economies and

structural limitations. This had a direct repercussion on production and employment in the

export-oriented manufacturing sectors. Second, drought and persistently low farm prices

weighed on farm incomes, which recorded a contraction of 11 percent in 2015 from a year

earlier, and therefore weakened purchasing power of agricultural households. Third, the high

level of household debt as a share of GDP continued to be a drag on consumption. The

buildup of household debt accelerated during the government’s first-car tax rebate scheme in

2012, albeit decelerating since 2013 (Chart 2).

Despite the above negative factors, private consumption still grew thanks to the

following factors.

1) Thailand’s labor market is flexible. Although drought and depressed farm prices led

to a fall in employment in the agricultural sector by 450,000 positions last year, a portion of

those labor were able to move into the manufacturing and services sectors, as reflected in an

increase of 380,000 positions in the nonagricultural sector. The services sector accounted for

the majority of the increase (Chart 3). The remainder is due to the domestic-oriented

manufacturing sector, while the export-oriented manufacturing sector contributed only

marginally1. Within the services sector, the tourist-related services continued to expand solidly

thanks to a growing number of tourists (Chart 4). Apparently, Thailand’s labor market is

flexible enough to absorb labor movements out of the affected sectors, namely the agricultural

1/

Refers to industries which export at least 30 percent of their total production.

-10

-5

0

5

10

Q1

2013

Q3

2013

Q1

2014

Q3

2014

Q1

2015

Q3

2015

Private consumption

Net exports of goods and services

Private investment

Change in inventories, and residuals

Fiscal spending

GDP

Source: Office of the National Economic and Social Development Board,

calculated by the Bank of Thailand.

Percent

Chart 1 Contribution to Thailand’s GDP growth(Change from the same period last year)

0

5

10

15

20

40

50

60

70

80

90

Q1

2008

Q1

2009

Q1

2010

Q1

2011

Q1

2012

Q1

2013

Q1

2014

Q1

2015

Household Debt to GDP Ratio

Growth of Household Debt (RHS)

Chart 2 Household debt to GDP ratio

and growth of household debt


Percent of GDP Percent (year-over-year change)


sector and the export-oriented sector. Unemployment thus remained stable during those

periods.

2) Average real income has increased.

After the new daily minimum wage of 300 baht

became effective on January 1, 2013, nonfarm

income in real terms rose by an average of 1 .7

percent per year. Although this growth rate is

considered low by historical standards, it has

helped shore up overall purchasing power amid

subdued farm incomes (Chart 5).

3) A decline in oil prices has partly

sustained household purchasing power. With

oil-related expenses accounting for 6 percent

of household income (Chart 6), a fall in oil

prices2 during 2013-2015 by 27 percent led to a

reduction in oil-related expenses by one fifth (Chart 7).

2/

Proxied by gasohol 91 price.

-500

-400

-300

-200

-100

0

100

200

300

400

500

Services Manufacturing Agriculture

Thousands of people

Note: Total employment in 2015 is 38 million people

Chart 3 Changes in sectoral employment

Source: National Statistics Office, and calculated by the Bank of Thailand

Note: *denotes a share in total employment in the services sector in 2015(14 million people)

-

-

-

-

-

-

-

Tourism-related services

(27%)* % *Trade sector Other services

% *

Percent

Chart 4 Employment growth in Thailand’s services sector

(Change from the same period last year)


Chart 5 Growth of real income in non-agricultural sectors Change from the same period last year)

-

-

-

- - - - - -

Non-agricultural Manufacturing

Services

MIN WAGE

Percent


Chart Shares of oil-related expenses in household income in 2013

Percent of total disposable income

Agricultural households

Self-employed (non-agricultural) households

Professionals

Employees

Retirees

All households

Source: Household Socio-Economic Survey

Chart 7 Energy-related expenses by occupation*

Note: *1) Excluding LPG, NGV, and public transportation costs

) Average oil expenses in 2015 is calculated by the average petrol

prices in 2015, multiplied by the amount used by a representative

household in each group, assuming that the consumption pattern

remains unchanged across time.

Baht/month

Average oil expenses in 2013

Agricultural households

ProfessionalsSelf-employed (non-agricultural)

households

Employees Retirees Average(all households)

Average oil expenses in 2015

Source: Household Socio-Economic Survey


4) Government measures and improved consumer confidence supported last year’s

consumption. During the last week of 2015, the government introduced a tax deduction

scheme applicable to purchases of goods and services up to 15,000 baht per person. This

measure helped shore up confidence of both households and businesses and buoyed private

spending during year-end. Such stimulative effect on consumption, however, was expected to

be temporary, as some purchases were brought forward from early 2016. As a result, growth

momentum of private consumption in January 2016 declined somewhat, as reflected in a

lower reading of private consumption indicators, particularly in the semi-durables category

such as clothing and apparels. In the absence of the government’s measure however

spending on semi-durables goods would have still registered an expansion. Moreover, private

consumption growth during the last quarter of 2015 was partly attributable to the accelerated

automobile purchases prior to a hike in vehicle excise tax effective January 1, 2016.

Looking forward, private consumption should continue to receive support from the

following factors. First, employment in the domestic-oriented manufacturing sector should

continue to expand. Second, employment in the services sector, particularly in the tourist-

related services industries, is expected to grow on the back of a positive tourism outlook in

2016. Third, the government’s mega investment projects, which are expected to launch this

year, should help boost employment in related businesses. Fourth, the prospect of farm

incomes should improve as drought is expected to ease in the second half of 2016.

Nonetheless, there remain two key factors which will act as a drag on consumption. First, the

elevated debt level has put households in a vulnerable position. Second, a slower-than-

expected global recovery will likely weigh down on merchandise exports, with further

repercussions on the incomes of domestic households and businesses. The Committee will

continue to closely monitor these risks to private consumption going forward.

recent economic developments - bank of thailand policy...to cambodia, laos, myanmar, and vietnam...

Documents