August 19, 2013 / 3:32 AM / 6 years ago

Thailand unexpectedly slips into recession in second quarter, central bank still seen on hold

BANGKOK (Reuters) - Thailand’s economy shrank unexpectedly in the second quarter, slipping into a mild recession on weak exports and domestic demand, but worries over high household debt are likely to keep the central bank from cutting interest rates further.

A view from a tall building shows traffic moving on highways in Bangkok March 6, 2013. REUTERS/Chaiwat Subprasom

The 0.3 percent contraction in Southeast Asia’s second-largest economy adds to a series of disappointing data casting a shadow over one of the world’s fastest-growing regions.

Still, economists said they expect the economy to regain momentum in the second half, reducing pressure on the Bank of Thailand (BOT) to reduce rates. Most expect the benchmark policy rate to remain unchanged for the rest of the year.

The April-June contraction compares with a revised 1.7 percent decline in economic output in January-March, the data showed on Monday. Most economists surveyed by Reuters had expected growth of 0.2 percent in the latest quarter.

A recession is typically defined as two consecutive quarters of contraction in gross domestic product (GDP).

On an annual basis, economic growth in April-June slowed to 2.8 percent, versus 3.3 percent in the poll, and compared with a revised 5.4 percent in January-March.

“The weaker-than-expected Q2 GDP growth further pressures the Bank of Thailand to cut its policy rate. However, high credit growth and rising household debt narrow the prospect for a lowering of interest rates,” said Bernard Aw with Forecast Pte in Singapore.

“The status quo on policy is the best way forward, particularly when the central bank sees a pick-up in economic momentum in the second half.”

After an interest rate cut in May, the Bank of Thailand’s monetary policy committee left the benchmark rate unchanged at 2.50 percent at its July meeting, citing high household debt as a concern.

The central bank has said current monetary settings are still appropriate for growth. It next meets on August 21.

Thailand, like other Asian exporters, has been hurt by prolonged weakness in global demand that is weighing on industrial production.

Domestic consumption - which makes up about half of the economy - also has declined due to the fading impact of government stimulus measures and recovery work after severe flooding in late 2011. Delays in public infrastructure plans have also dragged on investment.

Indonesia, Southeast Asia’s largest economy, has also started showing signs of succumbing to the global downturn, growing at its slowest rate for almost three years in the second quarter.


Other risks in Thailand include a resumption of capital outflows from emerging markets when the U.S. Federal Reserve begins to taper its massive stimulus program, possibly as early as next month, and political tension at home over an amnesty bill for political offences, economists said.

Also on Monday, the National Economic and Social Development Board (NESDB) cut its forecast for full-year economic expansion to 3.8-4.3 percent from 4.2-5.2 percent seen in May. A Reuters poll projected 4.0 percent growth.

That’s because of slowing exports, a high base effect, the diminishing impulse from economic stimulus measures and the possibility of a delay in the implementation of public investment plans and the slow recovery of household income, the agency said in a statement.

It cut its export growth forecast to 5.0 percent from 7.6 percent, reflecting weakness abroad.

The baht was little changed at 31.30 per dollar after the data, while the stock market .SETI fell 1.8 percent.

However, the NESDB and private economists expected some improvement in coming months. The economy expanded 4.1 percent in the first half from a year before.

“The Thai economy in the second half of the year is likely to improve from the first half,” citing the acceleration of the global economic recovery. It added growth of 4.3 percent for 2013 was possible if budget disbursements could be accelerated and exports rebounded.

Usara Wilaipich, a senior economist at Standard Chartered bank, said: “Looking forward, moderate growth is likely to extend into the second half of 2013,”

“Despite lower downside risks in the U.S., slowing demand from China and Asian economies will continue to drag on Thailand’s exports. Meanwhile, domestic demand is expected to grow moderately, given higher household debt and rekindled political risk. We maintain our long-held GDP forecast for 2013 at 4.0 percent.”

In the second quarter, export value totaled $55.6 billion, a 1.9 percent contraction from a year earlier, compared with 4.5 percent growth in the first quarter. That was due to weakness globally and the appreciation of the baht.

Private consumption grew 2.4 percent from a year before, against 4.4 percent growth in January-March. Private investment rose 1.9 percent on the year, compared with 2.9 percent on the quarter.

Editing by Kim Coghill

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