Thailand cuts growth outlook as dismal output casts doubts on recovery

BANGKOK Fri Sep 27, 2013 5:11am EDT

BANGKOK (Reuters) - Thailand cut its growth outlook this year and said policy would stay supportive as poor manufacturing output suggested Southeast Asia's second-largest economy may struggle to emerge from recession.

The fifth straight month of contraction in manufacturing output, worst than the market had expected, has fanned debate on when the economy can pull out of a downturn. Thailand is grappling with a current account deficit and capital outflow pressures ahead of a tapering in U.S. monetary stimulus.

Thailand's finance ministry on Friday cut the outlook on growth for 2013 to 3.7 percent from 4.5 percent projected in June due to weak exports and slower domestic demand.

"The MPC (monetary policy committee) is expected to keep the policy rate on hold until next year to support economic growth," the ministry's fiscal policy office chief, Somchai Sajjapong, told a news conference.

"But next year, there is a chance that the rate will go higher if inflationary pressure picks up," he said.

Exports were estimated to increase just 1.8 percent in 2013, which will result in a trade surplus of $4.9 billion and a current account surplus of $1.3 billion, he said.

On August 21, the MPC left the benchmark rate at 2.50 percent for a second straight meeting, saying that was appropriate for the economy to gain momentum.

It next reviews policy on October 16, and most economists expect no change.

Weakness in exports and slowing domestic demand pulled Thailand into a mild recession in the second quarter, as Southeast Asia's second-largest economy shrank on a quarterly basis in each of the first two quarters.

OUT OF RECESSION?

Some analysts expect Thailand's fortunes to improve at the year-end and the government has said the third quarter would see positive quarter-on-quarter growth.

"The outlook should be positive, judging from improvement in international countries which should support the export and industrial sectors," said Pimonwan Mahujchariyawong, an economist at Kasikorn Research Center, adding that output should improve in the final quarter of the year.

Thai authorities have said the economy should pull out of recession, believing shipments will rebound in the final months of the year, usually the country's export season.

"Looking ahead, fundamentals of the economy remain sound overall. Monetary and fiscal conditions will continue to be supportive," Bank of Thailand Governor Prasarn Trairatvorakul told a conference on Friday.

He said there were some concerns about the possibility of continued sluggishness in private demand, and supply-side constraints in the labor market and the production sector could hold back the future potential of investment and exports.

Industrial output in August fell 3.12 percent from a year earlier led by weakness in cars and electrical appliances. The fall was more than twice the median forecast of a 1.15 percent decline. Output fell in July by a revised 4.9 percent.

Capacity utilisation dropped to 63.45 percent in August from 64.54 percent in July, according to the Industry Ministry.

The patchy economic outlook may mean the central bank will keep interest rates low to help the economy.

Pimonwan at Kasikorn Research Center forecast growth of 3.7 percent for 2013 and that interest rates will be on hold for the rest of the year.

"We expect third-quarter GDP to be positive on the quarter and growth of 4-5 percent on the year," she added.

On Thursday, Thailand's surprisingly strong exports added to growing evidence that Asian exporters are starting to reap gains from stronger growth in the United States, the euro zone and Japan, but analysts warned of persistent risks.

Widespread flooding around industrial parks in Thailand from storms have threatened to cause production disruptions and government officials have also said factories are facing a shortage of labour which could curb output.

(Additioanl reporting by Boontiwa Wichakul; Editing by Jacqueline Wong)