The Year of the Dragon brings with it the expectation that the direction of the global economy will be better than that of 2023. Despite earlier concerns about a sharp global economic downturn, recent developments suggest a soft landing for 2024.
The World Bank recently reported that global economic growth will be 2.4% this year, slightly below the growth of 2.6% in 2023.
The economies of the United States, China, and Japan will still be expanding this year, though with lower growth than last year, while those of the Middle East, India, Latin America, and Asean will grow faster than last year.
With the slowdown in the growth of overall global economic activities, the rise in prices or global inflation rate will be 3.7% for 2024, as projected by the World Bank, which is lower than last year.
As inflation dampens, global interest rates are expected to decline slowly in the latter half of the year. The trend aligns with the anticipated decrease in the policy rate or the Fed funds rate in the United States by around 0.75% in the second half of this year.
Certainly, the global economic situation will impact the Thai economy, which is expected to show higher growth than that in 2023. The Thai economy is expected to expand to 2.5-3% this year, compared to 2-2.5% in 2023. If the Thai government’s push for the digital wallet project is successful, growth could rise by another 0.5 percentage points.
Key factors contributing to Thailand’s economic expansion this year include increased income from tourism, with a projected 35 million international visitors, up from 28 million in 2023. Tourism revenues are expected to benefit local businesses and small-scale shops.
Another contributing factor is exports. Although Thai exports contracted by 1% last year, this year’s exports are expected to increase by around 1-2% from the previous year. Exports to the US should continue growing from last year as US imports divert away from China and the electronics cycle is on an uptrend. Thailand’s exports to other markets, such as Asean and the Middle East, will likely rise.
Investment is also a crucial factor in economic expansion. Foreign direct investments (FDI) to Thailand will continue to rise this year from global economic and geopolitical considerations.
Companies from China, Japan, and Taiwan are expanding or relocating their production bases from China to Asean, including Thailand, to mitigate trade risks from geopolitical tensions and the slow growth of the Chinese economy.
In addition, there will be public investment funds of 200-300 billion baht for new government projects disbursed in May after the enactment of the FY2024 Budget in April.
If the proposed 500-billion-baht digital wallet project, equivalent to approximately 3% of Thailand’s GDP, is implemented, it could add half a percentage points to economic growth this year.
However, considering the inflation rate, the net real impact on the economy might be around half a percentage point after adjusting for inflation, savings, and purchases of imports.
Nevertheless, the economic landscape is not without risks.
This year’s biggest risk factors are ongoing geopolitical tensions, including conflicts in Ukraine and the Middle East, and the ongoing trade and tech war between the United States and China. If these escalate, they could result in much higher commodity prices than anticipated.
In addition, the inflation rate in Thailand will likely rise this year. The Bank of Thailand forecasts a 2% inflation this year, compared to 1.2% in 2023.
Contributing factors to inflation include a rise in the minimum wage in December last year and higher agricultural commodity prices due to El Niño, which will result in droughts through April this year. Rising freight costs following attacks in the Red Sea will also raise the prices of imports from the US and Europe.
The Thai economy also faces internal risks from its digital wallet project, which government loans will finance.
In addition to raising Thailand’s public debt by around 3% of the GDP (Gross Domestic Product), this large stimulus could raise prices, thus delaying the reduction in policy rate. This scenario has affected investor confidence, resulting in outflows from Thai stock and bond markets since September last year.
Thailand’s credit rating, currently BBB+, faces the risk of being downgraded to BBB by international rating agencies, which will raise the borrowing costs of the Thai government and corporates. The earliest enactment of the borrowing bill by parliament will only be in October if the many legal hurdles are overcome.
While the overall economic outlook for Thailand this year appears more favourable than the previous one, numerous risks need to be monitored closely.
However, there are opportunities in certain industries, such as green businesses, including bio-products, which are growing rapidly with global demand trends. Additionally, the retail sector in Thailand is poised to expand this year due to increased domestic consumption from tourism and the potential digital wallet project.
Amid the aforementioned uncertainties affecting the Thai economy for the years to come, firms and individuals will need to cope with the associated risks.
One way is through diversification, such as having multiple businesses or skills to thrive amid uncertainties. Wishing everyone a wonderful Year of the Dragon.
Writer : Kirida Bhaopichitr, PhD, is a Research Director for International Economics and Development Policy and Director for the TDRI Economic Intelligence Service (TDRI EIS) and Kittiphat Buaubol is a researcher at the TDRI.
First Publish : On Bangkok Post 31 January 2024