After the Rebound, Thailand's Economy Cools

October 19, 2010

BANGKOK, October 19, 2010 – After a robust recovery, Thailand’s economic growth will soften in the year ahead as the world’s advanced economies continue to grapple with the consequences of a severe financial crisis.

The World Bank said Tuesday it has revised its forecast on Thailand’s growth for 2010 to 7.5 percent from an earlier estimate of 6.1 percent. The revision was due to better than expected performance of Thai exports in the first half of the year, coupled with an important increase in domestic consumption, said Frederico Gil Sander, the World Bank Country Economist based in Bangkok.

However, the Bank estimates that the Thai economy will grow by 3.2 percent in 2011, as that will be measured against robust 2010 figures. Moreover, stagnation in developed economies will impede global demand for Thai exports. Increased exports to emerging economies and relatively strong domestic consumption can offset some, but not all, of the weakness in overall global trade.

These new forecasts will be published in the November 2010 edition of Thailand Economic Monitor, the World Bank’s bi-annual review of the country’s economic development and prospects.  

The Thai economy withstood the challenge of recent political turmoil and continued to grow through the second quarter of 2010, Mr. Gil Sander said at a briefing held Tuesday.  Orders for Thai exports continued to come in, and Thai consumers have been buying new cars - all bettering earlier expectations, leading to an upgrade of the 2010 forecast.

However, with budget cuts looming in Europe and unemployment persistently high in the U.S., demand for Thai exports may not be as robust next year as in the first half of 2010. In addition, inventory restocking – a temporary event in a business cycle – also contributed to strong export recovery during that period.

The lower growth forecast for Thailand next year is in line with the regional outlook. The World Bank also said Tuesday it expects the developing economies of East Asia and Pacific to expand on an average of 8.9 percent in 2010 but slow to 7.8 percent in 2011, citing the lack of spare capacity, the need for regional authorities to gradually cut back on stimulus measures, and the slow expansion of high-income economies still grappling with the consequences of the crisis.  

In this difficult environment, the World Bank said the Thai authorities will face a delicate task of having to manage rising flows of capital in search of higher yields. For fiscal policy, the challenge is to start reducing budget deficits while boosting public investment and developing social insurance mechanisms. Such mechanisms are vital, not only to shelter the most vulnerable from economic shocks in the medium-term, but also to start addressing longer-term concerns of an aging society.

More fundamentally, Thailand should pursue a new strategy of shared and sustainable growth, said Mathew Verghis, the World Bank’s Lead Economist in Bangkok. Elements of such a strategy include boosting growth in the services sectors, which have so far lagged manufacturing and hold potential for creating many jobs, and developing workers’ skills so that Thailand can enjoy innovation-led growth.

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