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Thailand's Q1 economic growth exceeds expectations, easing Central Bank pressure

Thailand's Q1 economic growth exceeds expectations

Thailand’s economy experienced a stronger-than-expected growth in the first quarter, driven primarily by a resurgence in tourism and a boost in private consumption. This unexpectedly robust economic performance has reduced the immediate pressure on the central bank to respond to the government’s calls for lower borrowing costs. Following the announcement, the baht appreciated, signaling positive market sentiment.

The National Economic and Social Development Council reported that Thailand's gross domestic product (GDP) for the three months ending in March increased by 1.5% compared to the previous year. Although this growth rate was slower than the 1.7% seen in the fourth quarter of the previous year and lagged behind the performance of other Southeast Asian economies, it still exceeded the 0.8% median estimate from a Bloomberg survey. Among the analysts surveyed, only one correctly predicted this outcome, while the majority anticipated the slowest expansion since the onset of the pandemic.

On a quarter-on-quarter basis, Thailand’s economy grew by 1.1%, surpassing the median forecast of a 0.6% gain. This positive growth followed a revised contraction of 0.4% in the October-December period. The baht continued to strengthen in response to this data, rising by 0.5% against the dollar by 11:41 a.m. local time, reflecting investor confidence in the country’s economic trajectory.

The stronger-than-expected GDP report may reduce the pressure on the Bank of Thailand (BOT) to lower borrowing costs in its upcoming meeting in June. Tensions between the government and the central bank seem to have eased, as Finance Minister Pichai Chunhavajira indicated last week that monetary policy decisions would be left to the BOT. This development suggests a more harmonious relationship between the government and the central bank moving forward.

Finance Minister Pichai emphasized that access to lending and liquidity were more critical than the interest rate levels, a sentiment that NESDC chief Danucha Pichayanan echoed on Monday. This perspective highlights the importance of ensuring that businesses and consumers can obtain credit easily, which is crucial for sustaining economic growth.

Despite the positive headline numbers, there remains “broad-based weakness” in the economy that supports the government’s argument for interest rate cuts, according to Bloomberg Economics’ Tamara Henderson. While private consumption was strong enough to offset a 2.1% decline in government spending, its growth rate slowed to 6.9% in the first quarter from 7.4% in the previous quarter. Additionally, the contraction in investment deepened, with a decline of 4.2% compared to a 0.4% contraction previously.

The NESDC presented a more conservative GDP outlook despite the surprising first-quarter results. It revised its growth estimate midpoint to 2.5% from a previous 2.7%, even as it adjusted projections for tourism and related revenue upwards. This cautious approach reflects underlying uncertainties in the global and domestic economic environments.

The state planning agency estimated that Prime Minister Srettha Thavisin’s rollout of a 500-billion-baht ($14 billion) cash handout could add approximately 25 basis points to economic growth this year. It is anticipated that over 40% of these funds will be distributed in the fourth quarter, with the remainder being allocated in 2025. Danucha emphasized this fiscal stimulus's potential to spur economic activity.

Danucha reiterated on Monday that monetary and fiscal policies must be aligned, stressing the importance of access to credit. In February, he had suggested that monetary policy should play a supportive role in bolstering the economy, highlighting the need for a coordinated approach to economic management.

The central bank’s policy rate has remained at a decade-high of 2.5% since September, even as consumer prices fell into negative territory in the fourth quarter of 2023 and GDP growth slowed. This high-interest rate environment has been maintained despite signs of economic weakness and declining inflation.

Thailand’s first-quarter GDP growth is still below the nation’s potential growth rate, noted Pisit Puapan, director of the Finance Ministry’s Fiscal Policy Office. He indicated that improvements in industrial and agricultural output are necessary to strengthen the economy. Addressing these sectors' performance is crucial for achieving more robust and sustainable growth.

Bloomberg Economics’ Tamara Henderson expects the BOT to reduce its benchmark interest rate by 25 basis points before the end of the year. Standard Chartered Plc economist Tim Leelahaphan believes the current state of the Thai economy justifies their prediction of a quarter-point rate cut next month, though he acknowledges risks to this forecast given the BOT’s hawkish stance. This anticipated rate cut reflects ongoing concerns about sustaining economic momentum.

Headline inflation increased in April for the first time in seven months, reversing a declining trend. The NESDC projects that consumer price gains will average between 0.1% and 1.1% this year, indicating a modest inflation outlook amidst ongoing economic adjustments.

Last month, the BOT stated that maintaining the rate steady provided “policy optionality” to address currency volatility, geopolitical risks, and uncertainty regarding the Federal Reserve’s potential shift to easing. This strategic pause allows the central bank to remain flexible in its policy responses.

Southeast Asia’s second-largest economy is expected to gain momentum in the second half of the year, supported by public spending following the delayed approval of the national budget. The implementation of the cash handout is anticipated to boost consumption, although critics warn it could spur inflation and hinder fiscal consolidation. The timing and effectiveness of these fiscal measures will be crucial for sustaining economic growth.

Wee Khoon Chong, a senior market strategist for Asia Pacific at Bank of New York Mellon Corp. in Hong Kong, described the GDP upside surprise as “very encouraging for the baht.” He suggested that the market narrative might shift to focus on the positive contributions from tourism rather than uncertainties surrounding the digital wallet program. This shift in narrative could further support the baht and overall market confidence in Thailand’s economic prospects.



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