Investment and domestic consumption drove GDP growth of 1.2 percent in Q3 2012. Amid downside risks to GDP growth, the central bank is expected to keep its policy rate unchanged this year.
Robust domestic consumption bolstered Thailand’s economy during the third quarter of 2012. After growing at 3.3 percent in the second quarter, Thailand’s GDP growth came in at just 1.2 percent in Q3 2012. Private consumption grew by 6.0 percent over the previous year and shielded the economy from external headwinds. Moreover, higher investments and government stimulus policies compensated for a decline in exports. Although the third-quarter performance exceeded expectations, key economic indicators signal a deceleration from the previous quarter. As a result, the National Economic and Social Development Board lowered its 2012 GDP growth forecast to 5.5 percent. Meanwhile, the Bank of Thailand (BoT) kept its 2012 growth forecast unchanged at 5.7 percent but lowered its projection for 2013. Downside risks persist, and the Thai economy will remain vulnerable to the external environment.
Thailand’s growth decelerated in Q3 2012 largely due to a drop in exports. Economic weakness in the United States and China dragged Thai exports down 1.2 and 11.8 percent, respectively. Furthermore, Thailand’s exports in October rose less than expected. In October 2011, a flood battered the Thai economy, and economists expected exports to grow by 20 percent over the previous year. However, data for October revealed that exports were up 15.6 percent from last year and up 5.8 percent from September 2012. Shipments to the European Union, Japan and the United States recorded strong growth, but exports to China declined. While exports in November and December are expected to be robust primarily due to base effects, the BoT lowered Thailand’s export growth forecast for 2012 from 7.0 percent to 4.4 percent.
The automobile sector staged a remarkable recovery as vehicle production hit a record high in October. Production increased to 252,165 vehicles in October, up 8.4 percent over September and more than five times from the same period last year. Tax incentives for first-time buyers pushed demand and resulted in higher production. Furthermore, an uptick in production was accompanied by a rise in vehicle exports. While month-over-month export growth was relatively flat, exports were up 79.7 percent over the previous year. A strong performance in the automobile sector could boost economic activity. However, industrial confidence ebbed for the fifth consecutive month in October. Concerns over the health of the global economy and higher operating costs weighed down the sentiment. The index came in at 93.0 in October, down from 94.1 in September and 98.5 in August 2012. A reading below 100 indicates pessimism.
Private consumption grew by 6.0 percent over the previous year and shielded the economy from external headwinds.
Meanwhile, Thailand’s cabinet approved a proposal to impose the minimum wage of 300 baht per day all over the country beginning January 1, 2013. Employer costs are likely to increase by 10–15 percent, owing to the wage hike. The Federation of Thai Industries (FTI) is likely to propose to the government certain measures that will limit the impact on the private sector. The FTI suggested the establishment of a “wage differential compensation fund” to help small and medium-sized firms handle the rise in wages. If the government agrees to the proposal, its fiscal bill may rise substantially in the coming year. Moreover, some experts believe that the policy will have no positive outcome for the industry because worker productivity is unlikely to increase, given the skill deficit. In addition, it is also possible that some companies may relocate operations to other countries in order to reduce costs.
Contributions from reconstruction-related spending supported the recovery until now, but they will likely recede. While the economy is expected to grow by 15 percent over last year in Q4 2012, the growth will be largely due to low base effects. With year-over-year comparisons skewed by the 2011 flood, it will be difficult to ascertain the real momentum of the economy going into 2013.