COVID casts two spells on Thailand’s economy
Amonthep Chawla, Ph.D., Head of Research CIMB Thai
Thailand – no longer a magical paradise
The National Economic and Social Development Council (NESDC) reported that the Thai economy during the first quarter contracted by 1.8% from the same period last year or shrank by 2.2% from the previous quarter after seasonal adjustment. This recession was driven by the COVID virus outbreak, dissuading traveling and any other public activities. The lockdown measure has helped to slow virus transmission; however, several economic activities stopped, leaving people without income or job. The number of tourist arrivals dropped by 38% in Q1, affecting hotels, restaurants and other tourism-related sectors. External demand was weak from the outbreak in China and subsequently spread to the rest of the world, causing a decline in exports. Manufacturing production shrank amid falling demand and high inventory. Construction slowed down, especially from high unsold stocks of condominiums. Budget was delayed during the early of the year, leading to low spending by the government. Meanwhile, households refrained from consuming big-ticket items, especially cars, leading to a sharp deceleration in private consumption on top of declining tourist spending.
Going forward, the virus outbreak could persist unless there is a vaccine, which means a series of new lockdown could be put in place if there are alarming new cases of infection. Tourism-related activities could be paused for a short while. The Thai economy could experience a sharp recession and slow recovery due to its heavy reliance on tourism. Is Thailand no longer a magical paradise under the virus outbreak? I may ask a difference question: was Thailand ever a paradise? Thai economy has its own structural problems, such as weak farm income, high income inequality, political uncertainty, population aging, and poor education. Despite these shortcomings, tourism helped stimulate growth. Thailand may have appeared to be a magical paradise for tourists with beautiful beaches, rich culture, and cheap but good food. But for some locals, the word paradise may be too exaggerating to describe their home. Now, what’s next? When the private sector is weak, the only hope is on the government. But how much will cash handouts to those affected from lockdown measures, together with other public programs, help mitigate the economic crisis?
Deeper recession coming in Q2
Despite massive fiscal stimulus packages and monetary easing, the economy could continue falling sharply in Q2. We projected a sharp fall of GDP in Q2 by 14% from the previous year. Exports could continue to plunge due to weak global demand and continual lockdown in major economies. The number of tourist arrivals in Q2 could drop sharply due to travel restrictions. The private sector would likely remain weak for both consumption and investment, following a decline in both farm and non-farm income and a lack confidence of consumers and investors. Consumption for durables, especially car sales, may fall at a sharper pace than the one for non-durables, such as food and beverages. Fortunately, the government injected cash handout to those affected from the lockdown measures and would implement other economic stimulus packages, allowing the Thai economy to be driven by the public sector. We projected that government consumption could accelerate by nearly 10% from the previous year. However, key risks remain on how fast and how much the government can initiate and implement those projects so as to speed up budget utilization.
Based on our forecast, the Thai economy could experience a lower contraction during the second half of the year. The economy during the second half could shrink by about 10% from the same period last year, but it could recover from previous quarters, marking an improving sign on the Thai economy. Despite fiscal stimulus and positive sign of declining infection, the Thai economy could face higher uncertainty due to a slower recovery in the tourism sector than what we expected earlier. Thus, we revised our GDP forecast for 2020 from -6.4% to -8.9%. Stay Alert! This economic crisis could be worse than the Asian Financial Crisis when the 1998 Q2 GDP shrank by 12.53% and the annual GDP in 1998 shrank by 7.63%.
Which spell: Reversal J or Avada Kedavra?
COVID casts two spells on Thailand’s economy. Economists often project the shape of economic recovery after the recession whether it could be a shape of V, U or L. Some may have projected a shape of W which implies that another round of a severe lockdown is needed to restrict the outbreak, so called the second wave attack. On the other hand, I projected a shape of a reversal J, meaning that the economy could fall sharply in Q2 while the recovery path could be prolonged due to delayed vaccine discovery and multiple lockdowns needed after opening the economy. Main difference from the U-shape is that global economy may not be able to rise as high as the pre-COVID period, due mainly to a de-globalization measure. Most countries would want to restrict imports for supporting recovery of domestic production while some may discourage outbound traveling for fear of losing income to other nations and may choose to encourage domestic tourism. By restricting flows of goods and services, economic efficiency may fall which may explain why economic growth could be lagged behind the pre-COVID period. The reversal J may have been a spell that COVID virus has casted on global economy, but it may not be the only one.
The other spell is a shape of recovery that we may have not seen in the past. The shape of it could be resemble to Harry Potter’s scar, marked by an unforgiveable curse, the death curse, Avada Kedavra. The lightning shape is like something between an N and a Z. In contrast to economists who usually have a pessimistic view of the real economy, investors tended to foresee bright future spots that asset prices have already bottomed out since the beginning of the lockdown. They are looking for business opportunities when the economy restarts while they also enjoy abundant financial liquidity provided by major central banks, including the Bank of Thailand. The government also injected cash handouts and will implement a series of economic stimulus packages afterwards. Attractive prices after a sharp correction may lure investors to project a speedy recovery in stock markets. That may explain the shape of recovery to resemble a lightning scar mark. Who is right and who is wrong between pessimistic economists and optimistic investors? My answer is that they are both right. Economists look at fundamental impacts of the economy which may take time for the recovery while investors look at future opportunities and reflect them in current prices. But we do agree on one thing. The future is brighter than where we are now. We will survive the crisis and we will rise again.
