Thai economy to expand slightly stronger in 2016, domestic demand to mainly drive growth

Thai economy is likely to post slightly stronger growth in 2016 as compared to 2015, according to ANZ. But, risk structure around the economy is not unilaterally tilted on the upside. Thai economy might disappoint again. However, the persistent absence of inflationary pressures might give space for monetary policy easing, particularly if domestic demand weakens. Appreciation of the NEER might erode export competitiveness, especially against Vietnam, its major trade competitor, noted ANZ.

“For Thailand, we are pencilling in slightly firmer growth at 3.0% in 2016, from 2.8% in the preceding year”, added ANZ.

The economy is likely to be mainly driven by domestic demand. Fiscal policy seems to be gaining momentum in the country due to a considerable pipeline of public works spending. Current rebound in domestic demand appears to be on track, according to ANZ. Consumption is also expected to increase.

The Cabinet approved a program in March to assist in boosting property sector and the economy. Developers will receive soft loans of THB 30 billion to construct properties with units costing not more than THB 1.5 million.

But fiscal multiplier is expected to focus on marginal delta and the rate at which the private sector spends the gains from fiscal injections, noted ANZ. If the planned investments and fiscal spending don’t materialize, there is a high risk of economic growth slippage.

“Hence we recently revised Thailand’s 2016 GDP growth forecast lower to 3.0%, given the rising risk of growth slowing again once fiscal stimulus fades”, added ANZ.

Meanwhile, Thailand’s headline inflation is bottoming out, though it is still negative. Weak energy prices will keep a check on upward inflection’s strength. Even if disinflation continues, core inflation is still in the positive territory. Since energy-related disinflation remains, domestic inflation is expected to remain weak, according to ANZ.

“Our expectation is for only a gradual rise in the headline inflation to average around 0.6% for the whole of 2016”, says ANZ.

There is a higher risk of a more protracted disinflation period, particularly if global commodity prices weaken more given the considerable degree of pass through into domestic consumer prices. If the recent strong rebound in the country’s domestic activity is sustained, it will permit the central bank to maintain its policy. However, if inflationary pressures continue to remain absent, it will give the central bank space for monetary policy, particularly if domestic demand weakens and the THB NEER gains so strongly that it removes the country’s export competitiveness.