Thailand’s growth seemed to have moderated in the second quarter of 2018. On the positive side, household spending, investment and exports all picked up and growth as a whole remained above trend. That being said, looking ahead, growth risks are significant.
In August, Thailand reported disappointing manufacturing data, however, which suggests a further slowdown in the country's GDP growth in the current quarter.
Obviously, the case for a macroeconomic policy shift to tightening from the current accommodative stance was dampened due to the slower growth. In fact, the Bank of Thailand Governor, Veerathai Santiprabhob, has been suggesting the continued policy accommodation in the medium term.
Strong exports but weak manufacturing
Thailand’s manufacturing index rose by only 0.7 per cent year-on-year in August, missing the consensus estimate of 3.1 per cent growth - the slowest rate of growth since April 2017.
Meanwhile, July growth was revised upwards to 4.9 per cent from the initial estimate of 4.6 per cent. In addition to that, manufacturing capacity utilisation also dipped to 65.9 per cent in August from 66.9 per cent in July, which results to be the lowest since last November.
Although the year-on-year manufacturing blip can be blamed on a technical factor due to a high base-year effect, the month-on-month growth performance was barely positive, 0.2 per cent to be specific, after two months of narrowing in June and July. This contrasts with a strong double-digit export bounce in August, which more than recovered the monthly declines in the previously mentioned months. This could imply that domestic demand was a weak spot for manufacturers in the last month.
Assuming a monthly manufacturing change in September at the average rate over the last three years, growth in the third quarter will see a slowdown to 2.8 per cent from 3.7 per cent in the second quarter. Where manufacturing goes GDP follows; it is estimated that the third quarter GDP slowdown to 4.1 per cent from 4.6 per cent in the second quarter remains on track.
The central bank should keep policy on hold
Aside from the GDP growth slowdown, inflation also peaked in August, slowly advancing toward the centre of the central bank’s 1-4 per cent target. Thailand's large current account surplus has been a basis of steadiness for the baht, allowing the central bank to keep policy accommodative in support of domestic demand. Despite slower growth, in September the central bank signalled a gradually tighter policy ahead and only two of the seven monetary policy committee members voted for a rate hike in September. A rate hike before year-end appears likely; direction is clear but timing is uncertain.
Moreover, the BoT policymakers are compromising on the need for continued policy accommodation. In fact, earlier this week, a Bloomberg report quoted Governor Veerathai saying that monetary policy was data-dependent and was unlikely to shift to tightening from an accommodative stance; economic figures support this.
Disclaimer:
This article was issued by Maria Fenech, investment manager support officer at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.