UPDATE 2-With no real government, can Thailand escape recession?
* Economy expected to contract in first quarter
* Central bank expects recovery from second quarter
* Much depends on getting a new govt, avoiding worse violence (Adds fresh election agreed for July 20, paragraph 13)
BANGKOK, April 30 (Reuters) - Some bold assumptions about a rapid end to a six-month political crisis are all that stand between Thailand and its first real recession since the global financial crisis.
Southeast Asia's second-largest economy is confronting weak exports, a year-long slump in industrial output and a drop in tourism, under a caretaker government with limited powers and a central bank wary of wasting ammunition on a political problem.
Protesters trying to topple Prime Minister Yingluck Shinawatra disrupted an election in February and will probably do the same again. She could be removed by the courts next month anyway, leaving a power vacuum and possibly sparking violence.
Undaunted, the Finance Ministry sees an improvement in the economy after what it says will be a contraction of less than 1 percent in the first quarter from the previous three months. On Tuesday it stuck to its forecast of 2.6 percent growth in 2014.
"That's based on the assumption that confidence will return in the fourth quarter after the political situation eases, that exports will grow 5 percent this year with a recovery in global markets and that tourism will grow 5.0 to 5.5 percent," Finance Ministry economist Kulaya Tantitemit told a news conference.
The Bank of Thailand also thinks things are looking up. On Wednesday it reported a small rise in investment and consumption in March from February, even if both were still down on the year.
"It's possible that March is the bottom for the economy this year, judging from consumption and investment which were fairly stable, and it's likely the economy will start recovering in the second quarter and clearly improve in the fourth quarter," said Don Nakornthab, head of its macroeconomic policy office.
But it has slashed its GDP growth forecast for 2014 several times because the unrest has hit tourism and confidence, and is set to cut it again from 2.7 percent. Last October, just before the political protests flared up, it expected 4.8 percent.
Benjamin Shatil, an economist with JP Morgan in Singapore, also sees some improvement but acknowledges the risks are high.
"We do not yet see a full-year recession scenario and expect growth momentum to improve into the second half of the year. A large part of this outlook hinges on the political situation and if there is no functioning government in the coming months, the risk to growth will clearly be on the downside," he said.
Pragrom Pathomboorn, an economist with KGI Securities, is among the more bearish. He thinks there could be a technical recession, meaning a contraction in both the first and second quarters, "because there's nothing pointing to an improvement".
"Nobody knows how the political situation will end. Exports have recovered somewhat but that's not enough to offset shrinking consumption and investment," he said. "If the situation remains unclear until early in the third quarter, it's very likely GDP will grow zero percent or contract this year."
Yingluck and the Election Commission agreed on Wednesday to rerun the election on July 20, which, if all goes well, could lead to a new government being installed in August. But protest leader Suthep Thaugsuban has said his supporters would disrupt any attempt to hold a ballot before electoral and other reforms.
Exports fell 3.1 percent in March from a year before and 1 percent in the first quarter, Commerce Ministry data showed on Monday. But the ministry expects growth of up to 4.5 percent in the second quarter and 5 percent for the whole of 2014, in line with the Bank of Thailand's 4.5 percent.
Industrial output in March fell 10.41 percent from a year before, the 12th such drop in a row, the Industry Ministry said on Monday, highlighting weakness in the car sector, hard disk drives and canned and frozen seafood, all important exports.
The Commerce Ministry said imports plunged 14.19 percent in March from a year before, the third double-digit drop in a row. Many imports are raw materials for products that are exported, so that is bad news for those expecting a recovery in shipments.
The details showed a drop of 18.8 percent in imports of vehicles and parts, so it's no wonder sentiment among car parts and machinery makers has been falling for 10 months, according to a March survey from the Federation of Thai Industries (FTI).
"The numbers fell more than we expected due to political factors, the Thai economy and stalled government investment," Surapong Paisitpattanapong, a spokesman for the FTI's automotive group, told Reuters after the survey was published on Monday.
Mitsubishi Motors Corp said last week its sales in Thailand fell about 40 percent in its business year to end-March due to the protracted political crisis plus the end of a government rebate for first-time car buyers.
The FTI is set to revise down its estimate that 2.4 million vehicles will be produced this year, half for domestic sales.
"The goal to produce 1.2 million cars for the home market may not be feasible any more. We will be revising our projection down by at least 100,000 vehicles," Surapong said.
PUBLIC WORKS SCRAPPED
The political antagonism has put paid to huge government infrastructure work that was contested by the opposition because of a lack of transparency in off-budget projects.
Finance Minister Kittirat Na Ranong had said the projects could add one percentage point a year to economic growth over several years but they were effectively scrapped when a court ruled them illegal in March. [IDn:L3N0M91PL]
Thailand's top steel producer, Sahaviriya Steel Industries Pcl, said on Monday it now expected 2014 sales to be flat at 2.1 million tonnes. It had forecast a 15 percent rise.
"The political situation has dampened domestic demand for steel and we have seen a slowdown since November and December," Chief Executive Win Viriyaprapaikit said.
Twenty-five people have died in political violence since last November, including two children killed by a grenade in a central Bangkok shopping area near a protest camp.
Many countries have issued warnings about travelling to Bangkok, especially when a state of emergency was in force there earlier this year. As a result, many tourists have avoided the capital and some have just decided to give Thailand a miss.
The Tourism Council of Thailand says the country attracted about 6.5 million visitors in the first quarter, down from 7 million in the same period last year.
Pornthip Hirunkate, the council's vice-president, noted a 22.5 percent drop in the number of Japanese tourists, who tend to be among the higher spenders, adding Japanese tour companies had simply dropped Thailand from their programmes for now.
Some in the industry are putting on a brave face.
AirAsia X Bhd, the long-haul arm of Malaysian budget carrier AirAsia Bhd, opens a Thai affiliate in June, starting with a service between Bangkok and Incheon in South Korea.
"It's not the first challenge Thailand has gone through. They've gone through many episodes and each time tourism bounces back very strongly," Azran Osman Rani, chief executive of Thai AirAsia X told Reuters, although his optimism about the launch was also based on inquiries from Thais keen to get away.
(Additional reporting by Orathai Sriring and Pairat Temphairojana; Editing by Jacqueline Wong)