The Thai economy: falling back to earth?

For 30 years Thailand’s economy has grown vigorously, with only a single deep recession (the 1997-98 Asian Financial Crisis) and a much shallower one for the 2009 GFC. However, the Bank of Thailand now predicts 2014 GDP growth at an anemic 1.5%. If so, this will be the second consecutive year of weak growth and the third in the past 4 years, setting the Thai economy on a path well below that of its closest regional comparator, Malaysia. The two countries have tracked each other closely for many years, but now show signs of divergence, with Malaysia’s 2014 growth now heading for the upper end of the official 5.0 – 5.5% forecast (see chart). Annual GDP growth Thailand and Malaysia WDI.xlsx

As the NYT reports, the Thai economy faces a triple threat this year: a drought affecting agricultural production and incomes; a heavy burden of household debt that may reduce domestic spending, and the possibility of slower growth in Thailand’s major export partner, China.

Trade shocks and bad weather (including the devastating floods of 2011) are exogenous, but looking at the chart it’s easy to understand why debt might have ballooned: Thai households accustomed to income growth at about 5% per year from 2000-08 have suffered three major negative shocks in the past 5 years, and may now face another. They have borrowed to smooth consumption in the belief that each shock was somehow exceptional, but may now be concluding that lower growth is the new normal. That will mean lower consumption growth while they adjust their debt loads accordingly.

Managing this transition will be hard for individual households (Thailand’s social safety nets have big holes, especially where rural households are concerned). It will be even more of a challenge for the military junta that now rules the country, as this unelected government faces a severe shortage both of fiscal resources and sensible economic policy ideas.

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