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EXTERNAL RISK

External risks to escalate in second half, BOT says

The Nation

BANGKOK: -- After a strong recovery in the first half, the Thai economy will face some headwinds in the second half as private consumption slows on growing external volatility, the Bank of Thailand's Monetary Policy Committee said.

The MPC expects risks to the global economy to escalate, given the dampened recovery in the US and delayed resolution of structural concerns in the euro area.

"The global economy, given its weak outlook and heightened risks, continues to be the major source of downside risks to economic growth. While progress made on the sovereign debt crisis has helped to calm the marketplace temporarily, worries on global growth prospects seem to escalate along with additional signs of a slowdown in industrialised and emerging-market economies. Some central banks have also eased their monetary policy further to contain downside risks to growth," the MPC said in its inflation report released today after the July 25 meeting.

"This time, the MPC continues to revise down its growth projection for Thailand's trading partners. The euro economy is expected to remain in recession in 2012, before starting to recover gradually next year. At the same time, economic momentum in the US and Asia will subside throughout the projection period."

The MPC cut the 2012 growth projection from 6 per cent to 5.7 per cent. It also lowered the growth forecast for 2013 from 5.8 per cent to 5 per cent, given the continued slowdown from the previous year's second half and the base effect due to a post-flood surge in the previous year's first half.

"On the whole, the MPC believes downside risks and uncertainty from the global economy will increase this time. Thus, the fan chart for economic growth is skewed downward to a greater degree compared to the previous one, and is wider throughout the forecast period," it said in the report.

In the second quarter, as the manufacturing sector started to resume production after last year's floods, the gross domestic product expanded 3.5 per cent, according to the central bank.

The MPC noted that on the external front, export recovery remains weighed down by global demand conditions. Merchandise exports will be weaker than previously assessed, as manufacturing exports suffer from sluggish global demand and agricultural exports are negatively affected by a contraction in rice exports. However, exports of services should remain resilient thanks to the tourism sector. Meanwhile, imports are projected to decelerate in the second half of the year, in line with diminishing reconstruction needs and weaker prospects of merchandise exports.

Meanwhile, private demand has rebounded to pre-flood levels. Private investment has been growing favourably on the back of reconstruction investment in the first half of the year, but is likely to subside as most reconstruction demand wanes in the third quarter. Nonetheless, investors' positive sentiment and commitment to long-term plans will lend support to investment growth going forward. On the other hand, private consumption continues to benefit from pent-up demand, especially for automobiles. Some deceleration is expected from the second half onward, but overall momentum should be supported by favourable income prospects, continued fiscal stimulus and conducive monetary conditions.

"Inflation pressure is likely to soften relative to the previous assessment. While economic growth has picked up firmly and is close to potential in the second quarter, demand pressure is expected to abate as economic momentum decelerates in the second half of the year," the MPC said.

Inflation forecasts were also revised downward, from 3.5 per cent for both 2012 and 2013 to 2.9 per cent and 3.4 per cent, respectively. The core inflation forecasts are cut from 2.5 per cent to 2.2 per cent in 2012 and from 2.1 per cent to 1.9 per cent.

The MPC foresees limited pressure from global oil prices, as slow growth globally would drag down prices. Meanwhile, domestic retail oil prices are likely to be steady this year, given government's policy in administering the prices. At the same time, commodity prices are projected to recover gradually in line with oil prices, while fresh food prices are likely to fall in the near-term given abundant supply.

-- The Nation 2012-08-04