Written by Mali Chivakul, EM economist at J Safra Sarasin Sustainable Asset Management
Thailand’s GDP growth disappointed in 2023. Weak manufacturing activity, tight monetary stance together with a slow recovery in tourism contributed to lower-than-expected growth. In the short-term, we expect the recovery in tourism to provide a modest boost to activity.
The government’s digital wallet plan, if implemented, should also help lift consumption and headline growth. Still, we expect the Bank of Thailand to be cautious and wait until the digital wallet program is launched before cutting rates. Moreover, there are many structural growth headwinds, and there is no sign from the current government that it will proceed with structural reforms.
Disappointing GDP growth in 2023
GDP growth came in below expectations both in Q2 and Q3 in Thailand, and the Bank of Thailand only expects growth to average 2.4% (lower than 2021’s 2.6% despite the reopening of the economy). Thailand was one of the last emerging markets (EMs) to regain its pre-pandemic output level. Its post-pandemic growth trend has also weakened, compared to pre-2020.
Manufacturing production fell throughout 2023
Manufacturing activity fell throughout 2023 following weak global trade and domestic demand. Manufacturing capacity utilization at 57% suggests significant economic slack. Even as exports started to pick up in the second half of 2023, manufacturing output declined further, unlike most of its Asian peers. The recent exports recovery was on the back of the upswing in the global tech cycle. Strong imports of computer and electronics capital goods also suggest that robust electronics exports should continue in 2024. Other important export sectors such as auto, however, remained sluggish.
Gradual recovery of tourism and tight monetary policy contributed to weak domestic demand
Weak domestic demand has been driven by both the gradual recovery of tourism and tight monetary policy (especially given high household indebtedness). The tight monetary stance contributed to falling demand as corporate credit growth turned negative starting in Q2. Elevated household debt (at close to 90% of GDP) means that households’ interest burden has risen significantly following the increase in policy rates from 0.5% to 2.5%.
Subdued inflation due to lower food and energy prices and weak demand
Consumer price inflation has already fallen below the Bank of Thailand’s target. Headline CPI has been in deflation for a few months already, driven mainly by lower food and energy prices, with government subsidies supporting the latter. Core inflation was very low at 0.6% in December, reflecting weak domestic demand.
Tourism to do well this current high season
Tourism recovery has been gradual so far. The good news is that the high tourism season (November to February) seems to be off to a bright start. November tourist arrivals at 2.64 million was the highest in the last 2 years, with strong showing for ASEAN and European markets. Chinese tourist arrivals remain low, especially compared to the pre-pandemic period. Advanced booking rate suggests a strong high season, with the 3-month advanced booking rate already higher than it was in the high season of 2019-20 and 2022-23.
Tourism and digital wallet program should boost growth to the upper end of the government’s 2.7-3.7% growth range
While we expect strong tourism income and export recovery in 2024, tight monetary policy will still likely weigh on growth. We expect the Bank of Thailand to remain on hold, even as inflation has already met the target, mainly due to its financial stability concerns (low interest rates would encourage more household debt accumulation), external financial pressures (negative carry even once the US starts cutting is policy rate this year) and the digital wallet policy uncertainty. The cash handout program (10,000 baht per person), which will be funded from outside the budget envelope, aims to stimulate domestic consumption starting in May. If launched, it should propel 2024 growth to the upper end of Prime Minister Srettha’s recent indication of 2.7-3.7% GDP growth. Its launch is however still subject to legal risks. Given large slack in the economy, we do not foresee significant inflationary pressure from the stimulus.
Structural growth challenges include low population growth
Still, beyond a short-term boost, the Thai economy faces many medium-term growth challenges. From the factor of production point of view, all three factors—labour, capital and productivity—face challenges. Thailand’s population growth has fallen below 1% since 2000 (around the same time as China’s), and was 0.1% in 2022. Its working-age population already peaked in 2017, and the share of the working-age population is expected to drop from 68% this year to 63% in 10 years. This implies that the already-high old age dependency ratio will rise further.
FDI could improve with further reforms to the labour market and to the quality of the country’s institutions
Capital accumulation and productivity improvement also faces headwinds. Amidst US China tensions, Thailand has not been able to attract more foreign direct investment that, instead, has gone mostly to Vietnam, Indonesia and Malaysia. Wages are not as competitive as Vietnam’s, while skill shortages have limited a move up the value chains. Thailand’s institutional quality has also deteriorated over the last 10 years, when compared to its regional peers. This includes relatively worse corruption controls. Still, the new government has been spending its energy on the digital wallet program and has not focused its efforts on any of these structural issues.
