Weak demand for goods exports weighs on Thailand’s growth

• Real GDP growth for the second quarter of 2023 was slower than EIU expected, at 1.8% year on year, from 2.6% in January‑March.

• Weak non‑tourism export demand, the impact of political uncertainty on investment and government consumption contributed to mediocre 2.2% growth in the first half of the year. Thailand’s GDP growth underperformed those of Indonesia, the Philippines, Vietnam and Malaysia, but did better than trade‑dependent Singapore in the first half of 2023.

• We expect the ongoing recovery in the tourism sector, resilient household consumption, and improving investment as well as government spending, to deliver higher growth in the remainder of 2023 and 2024. The imminent appointment of a prime minister from the Pheu Thai Party should support confidence. 

Resilient household consumption supported growth amid weak external demand

At 1.8% year on year (0.2% quarter on quarter), the pace of economic expansion in April‑June was slower than we had expected. There was an encouraging performance from the country’s households; in spite of rising interest rates, private consumption grew by 7.8% year on year in the second quarter. However, there was little to cheer in other expenditure components.

Government spending was down by 4.3% year on year to its lowest level in absolute terms since early 2021, owing to a prolonged political impasse following the general election in May and the pandemic-related high base. State spending on healthcare has dropped to more typical levels. Political uncertainty, coupled with weak external demand, kept a lid on investment growth, which slowed to 0.5% year on year, from 3% in the previous quarter. Public spending on equipment was at its lowest level since 2014, suggesting that political dysfunction rather than the vagaries of the business cycle is the reason for the current slump.

Meanwhile, merchandise exports improved from the levels of January-March, but remained down by 5.8% year on year. Some of this weakness is likely to be reflective of the post‑pandemic demand bounce, when inventories were empty and needed restocking. Merchandise exports in 2021 were 8.6% higher than those in 2019, which is not a sustainable pace for export growth. Nevertheless, there are other reasons to be concerned about the short-term outlook for exports. We expect demand from the US economy to remain feeble in the remainder of 2023 under the pressure of higher interest rates. There will not be much reprieve coming from either the EU or China, given their lacklustre growth outlooks, which spell a soft export outlook for Thai goods exports in subsequent quarters.

More promising are Thailand’s exports of services, which are dominated by the tourism sector. Exports of services were up by 54.6% year on year in real terms in the second quarter, driven by a strong recovery in tourism. The nominal value of exports of services stood at Bt474bn (US$13.8bn), which was 87% of the pre‑pandemic peak of Bt546bn in July‑September 2018.

An ongoing recovery in tourism will support export revenue 

In the second half of this year, we expect continuing recovery in tourism to support the export sector even amid soft demand for goods export persists. Despite a weaker than expected number of arrivals from Chinese tourists in the first half of 2023 (25% of the level recorded in the first half of 2019), visitors from other countries have recovered strongly such as those from the Association of South‑East Asian Nations (89% of the 2019 corresponding level), the US (77%) and Russia (96%). The cumulative number of total tourist arrivals at end‑June stood at 12.9m (65% of the level from the same period in 2019). This makes Thailand’s target to reach 29m in 2023 achievable, given that the fourth quarter of the year is typically a high season for tourism.

Domestic demand will improve after the new government takes over

In contrast to the challenging outlook for the external sector, prospects for the domestic economy are set to improve. At the time of writing the Thai parliament is about to vote for a third time on a new prime minister, and we expect a compromise candidate, a property tycoon Srettha Thavisin of the Pheu Thai Party (PTP), to be approved. Srettha (and the PTP, more broadly) are a less confronting prospect for politicians aligned to the military and conservative establishment. Unlike the election’s top winner, the Move Forward Party (MFP), the PTP is not targeting a reform of the country’s lese majesty law. Even if the PTP proves less radical than the MFP in reform, its installation at the head of a coalition government will still have consequences for economic policy.

Government spending is set to rise quickly, through an expansion of the welfare state, while the PTP has also promised more investment in digitalisation and innovation to address the corporate sector’s concerns about productivity. On the assumption that the PTP‑led coalition does not immediately stumble, the resolution of the post‑election impasse is also likely to lead to a moderate boost in investment from the private sector, for whom political uncertainty has been a disincentive to spend.

The outlook for private consumption, accounting for 60% of GDP, remains broadly positive. However, the interactions between the new government and the Bank of Thailand (BOT, the central bank) will be an important factor in determining the precise path for household spending. The PTP is keen to hand economic power back to workers, both urban and rural, and wants much faster wage growth and more even income distribution. For its part, the BOT sees such a strategy as potentially inflationary.

We expect these factors combined to deliver GDP growth in the range of 3‑4% in the second half of 2023 and about 4% in 2024. The strengthening domestic demand will keep the central bank cautious. Despite a much weaker growth performance in the second quarter than previously expected, another 25‑basis-point increase in policy rate before end-2023 cannot be ruled out yet. The BOT will be monitoring the trend in core inflation. We believe that the central bank’s concern over inflation expectations will guide its future move in monetary policy.

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