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Stagflation looms next year: economist

Thailand, like other Asian countries, is likely to face stagflation next year, with lower economic growth against high inflation, in light of “debt monetisation” of advanced economies and growing demand in China, according to an economist.  Kobsidthi Silpachai, head of market and economic research at Kasikornbank, said Thailand could witness slower growth in gross domestic product as global growth falters.

Despite low public debts, the country is exposed to external factors and relies mainly on exports, many destined for slowing Western economies. Currently, the market consensus expects that the Western economies will maintain growth next year. However, there are signs of slowing economy.  “This is similar to 2008 when the United States was still growing and had been expected to expand in 2009 but its economy contracted 3.5 per cent then,;”Kobsidthi said.

Consensus could change accordingly, he warned. The Group of Seven’s leading economic indicators are near or below zero, signalling a likely recession, and the euro zone could have already entered a recession, he said.  Thailand cannot avoid being a hostage of a global economic crisis, which would likely reduce Thai export volume and imported content for re-export, as a result of slower demand following the gloomy global economic indicators, he said. Many Thai export items, such as electronic items, automobiles, gems and jewellery, and plastic products, contain large amounts of imported content.

Historically, Thailand’s export volume moves closely in line with global economic growth.  However, it remains to be seen whether the current expansionary fiscal policy can help boost the Thai economy while inflationary pressure remains a concern amid the Western economies’ continuing debt monetisation by printing money for injection into the system, which in turn floods the global financial system, to jolt their economies out of recession.

It is estimated that every US$1 billion printed will increase the value of Thailand’s foreign reserves by $194,000.  The Western economies’ debt monetisation could also fuel inflation in Thailand, as all countries are investing excess money in assets and commodities. A huge amount of money is in search of higher-yielding assets in Asian economies including Thailand, where growth rates are higher, and have boosted their asset prices, Kobsidthi said. Another way was through higher prices of commodities in dollar term, such as gold and oil, due to US dollar depreciation.

China’s growing demand will also fuel inflation, he said. Thailand’s inflation is tied to the size of China’s rapidly growing economy, as higher demand will likely boost commodity prices.  “If [China’s GDP] continues to expand at 8-9 per cent a year, do not anticipate a no-inflation impact, as this means Chinese competition for resources,” Kobsidthi said, adding that the food price index might not decline.  KBank expects Thailand’s core inflation to touch 3.4 per cent in 2012. That estimate exceeds the current upper end of the Bank of Thailand’s inflation target framework at 3.00 per cent.

Source: The Nation

ThaiVest Editorial Team

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