Roaring Thailand manufacturing triggers growth forecast upgrade

UBS now sees 2013 real GDP growing at 5.5%.

Here's more from UBS:

Forecasts up on Q4 strength. The low base associated with the 2011 floods and subsequent recovery is now pushing year-on-year growth rates to unusual highs. However, indicators of incremental growth are also impressive. Thai manufacturing production has surged so far in Q4, prompting us to revise higher our growth forecasts.

GDP growth revised higher. Manufacturing production increased 7.1% mom in October and 8.6% in November, seasonally adjusted, more than reversing the 5.6% decline in September. Seasonal adjustment factors may have been distorted by the floods in 2011, but the message from unadjusted data is likewise one of strength. We had been looking for stagnation in Q4 GDP after strength earlier in the year. Now the 8% gain in manufacturing output in October and November on average relative to Q3 leads us to upgrade our forecasts. We now project 2.5% quarter on quarter seasonally adjusted growth in Q4 2012 and 6.3% real GDP growth for 2012 on average (up from 5.5%). Our 2013 real GDP forecast is revised to 5.5% from 4.5%. The BoT has guided that its 4.6% real growth forecast for 2013 will also be revised higher.

The gain in Thai manufacturing production was led by electronics and vehicle output. The gain in the latter was driven partly by domestic demand arising from the government's first time buyer car subsidy. As of the end of December 2012, some 1.25m vehicle sales were reported to have qualified for the subsidy - which compares to vehicle sales of around 0.8m in 2011 and 2010. The rise in electronics output, on the other hand, must be more export related but does not jive well with lead indicators of international trade.

While we have been expecting a moderate pick-up in exports through 2013 after some weakness in H2 2012, the gains in Q4 production have come earlier and were stronger than expected. We continue to expect an improvement in the export backdrop in 2013, but not one sufficient to support the momentum in October and November. Likewise, domestically the winding down of the first time car buyer program should slow growth in motor vehicle production. As such we look for a moderation in production momentum after the strength recorded in October and November.

This said, exports have also recovered in October and November while indicators of domestic activity remain robust. BoI Investment application approvals in the three months to November 2012 were 25% stronger than in 2007, the previous high for that three-month period. Likewise cement consumption in the three months to November 2012 is the highest since 1996 for the same period. The BoT's private investment index jumped higher in November and domestic business confidence indicators are above average. This suggests investment momentum has been stronger than we expected, and we disproportionately increase our investment forecasts as part of the above GDP growth revision.