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Thailand’s economic recovery is set to be delayed by a surge in Covid-19 cases and renewed lockdown measures in April and May.
Thailand’s economy has been gradually recovering from the pandemic shock in H120, on the back of fiscal stimulus and a relaxing of domestic mobility restrictions, growing 0.2% q-o-q in Q121. Indeed, we expected the economic output to only recover to its pre-pandemic level by 2022, following the 6.1% contraction in 2020.
However, with the economy facing an aggressive rise in Covid-19 cases once again (see chart below) and policymakers tightening restrictions on activities, we believe the recovery will face a setback. Officials have forced the closure of restaurants, hotels and entertainment venues, with the severity of measures differing among provinces and varying in lengths of duration.
While not as severe as measures imposed a year prior, the disruptions will send economic activity into contraction once again in Q221. As such, we have slightly lowered our 2021 real GDP growth forecast, from 3.3% to 3.0%.
- We at Fitch Solutions have revised down our outlook for Thailand’s real GDP growth in 2021, from 3.3% to 3.0%.
- In Q121, the economy grew 0.2% q-o-q and contracted 2.6% y-o-y, beating consensus expectations on the back of fiscal stimulus.
- A surge in Covid-19 cases and renewed lockdown measures in Q221 will stall private consumption and postpone plans to reopen the country to tourists.
- Moreover, we note still elevated headwinds to the external sector in the near term as potentially setting the growth outlook back further.
Outbreak To Keep Restrictions In Place For Longer
Note: Scores out of 100; 100 = very stringent lockdown measures. Source: Our World In Data, Fitch Solutions
In Q121, the economy grew better than Bloomberg consensus expectations, coming in at 0.2% q-o-q growth relative to an expected contraction of 1.0%. As a result, the economy was down 2.6% y-o-y, relative to 4.2% the prior quarter and expectations of -3.3%. Government consumption and gross fixed capital formation (GFCF) expanded by 2.1% and 7.3% y-o-y, reflecting strong fiscal stimulus measures; public investment grew 19.6% y-o-y.
In contrast, household consumption fell 0.5%, down 0.4% q-o-q, partly reflecting continued Covid-19 concerns, boding poorly for the outlook in Q221. Exports continued to be hampered by the lack of tourism, but grew 8.0% q-o-q on the back of stronger demand for goods exports. Imports rebounded more strongly, by 12.9% q-o-q, reflecting the pick-up in capital goods demand and inputs for export production.
Recovery To Stall
Thailand – Real GDP Growth, % chg
Source: Bloomberg, Fitch Solutions
Private consumption growth will come in lower than we forecast previously, down from 1.2% to 1.0% through 2021 (contributing 0.8pp to headline growth).
The Consumer Confidence index dipped from 48.5 in March to 46.0 in April, as concerns over the rise in Covid-19 cases weighed on future expectations. Indeed, confidence around employment opportunities and future income both fell, reflecting the likely increase in household savings amid the renewed economic uncertainty.
Retail sales data is likely to slump in the coming months as suggested by Google mobility data. Retail and recreation mobility was 27.0% below pre-pandemic trend levels as of May 13, with mobility levels in transit stations and workplaces down 56.0% and 26.0% respectively. The uptick in consumer prices in April will also weaken household disposable incomes as temporary supply-side factors bolster inflation; headline inflation was up 1.4% month-on-month (3.4% y-o-y) relative to 0.2% in March.
New Outbreak To Lower Households’ Consumption Rate
Government consumption will continue to provide somewhat of an offset to the weakness in household demand, growing 1.8% in 2021 (revised up 1.5%). S
ocial transfers will pick-up in response to the renewed lockdown measures and we expect fiscal policy to remain accommodative through the year given low borrowing costs and domestic political pressure to aid lower income households and small and medium enterprises (SMEs). The government announced a package of USD11.2bn in stimulus via soft loans and employee support, highlighting the willingness of policymakers to provide aid. With private sector credit uptake also subdued, we believe the government will seek to take up the slack to boost growth. SME borrowing fell 5.0% q-o-q in Q121 and the domestic order book sentiment index fell from 54.1 in March to 45.1 in April.
Thailand’s Economy Set For A Modest Recovery
We have revised up our forecast for GFCF growth from 2.0% to 3.4%, on the back of supportive fiscal measures.
There was some delay to the implementation of public work plans announced in 2020 but this should support growth in 2021. Despite tightened Covid-19 measures and some disruptions to the construction sector, the government has sought to keep the manufacturing sector in operation and push ahead with infrastructure investment. The capacity utilisation rate improved further in Q121, rising from 63.2% in December 2020 to 69.6% in March.
In addition, we expect private investment to be buoyed by the autos industry as Thailand ramps up its efforts to establish its place within the electric vehicle supply-chains. Indeed, loose credit conditions and government tax relief for corporate investment will entice some investment in the latter stages of 2021 as the global economic outlook strengthens and as Thailand’s vaccination campaign accelerates. We do flag the weak credit take up amongst SMEs as a potential drag on investment and note that supply-chain disruptions – particularly due to semiconductor shortages – could result in postponed fixed investment.
External Demand Challenges A Major Risk To The Outlook
We expect net exports will contribute 2.4pp to headline growth in 2021, relative to 5.3pp drag in 2020.
On the one hand, improving economic outlooks in the US and Europe should provide a boost to goods exports. On the other, we note the rise in Covid-19 cases in key trade partners such as Japan, Singapore and Malaysia could dampen demand in Asia.
Slowing credit growth in China also indicates some easing of the pace of its economic recovery and the shortage of semiconductors globally could hamper Thailand’s exports of machines, electronics and autos.
We also note that the rise in Covid-19 cases will likely deter tourist arrivals through Q221 and potentially delay plans to allow tourists into Phuket from July, with Thailand having only fully vaccinated 1.0% of its population as of May 13. Overall, the balance of risks to the external outlook is tilted to the downside and could lead to another downward revision to Thailand’s growth. Import demand also remains vulnerable, given the weaker private consumption outlook, and imports of inputs for export goods could soften if demand from Asia fails to rebound strongly.
Risks To Outlook
As noted the risks are tied to authorities struggles with containing Covid-19 outbreaks and the external demand outlook. Further outbreaks would weigh on domestic demand and ultimately private investment. Moreover, the recovery in tourism would be non-existent and in turn could see greater social unrest as the employment outlook weakens. From an external perspective, the risks around weaker Asian demand and semiconductor shortages could hamper Thailand’s recovery given exports account for 54% of the economy.