Thailand’s export volumes grew 1.3% in August

Defying expectations, the economy gathered momentum in August, latest data show. Export volumes grew by 1.3% MoM, or 20% YoY, contrary to the 2.5% drop that we had pencilled in (and our 4.6% GDP growth forecast is one of the highest in the market suggesting consensus expected an even bigger drop in volumes). A payback in exports volumes seemed due in view of the very rapid rise in the first half of the year (Jan-Jul: 17% YoY) and the lacklustre growth in production in the same period (-2% YoY).

The rise in export volumes only points to continued scope for strong growth in production in the months ahead despite weak global sentiment as production plays catch-up with exports. Production rose by 4% MoM, in August taking the year-on- year rate of growth from -1% in July to 7% in August. The latest export volume data affirm our expectation for a couple of more months of strong production, which by extension, points to strong 3Q GDP growth, probably in double digits.

Inflation is on tap today. Consensus expectations range a wide 1%-point with our forecast being the median 3.9% YoY. Forecasting inflation is tricky due to the impact of recent bad weather conditions on food prices, as well as due to the reduction in retail fuel prices, leaving considerable scope for surprise. The inflation picture looking ahead too is complicated by the uncertainty surrounding the introduction of plethora of government subsidies and tax incentives and the eventual removal of such measures.

Overall, with expansionary fiscal policy apparently in full swing, and with the policy to raise rice prices sharply, it may not be long before core inflation rises and headline inflation too may prove stubbornly elevated. Thus, we maintain our expectation for headline inflation of 4% in 2011 and 2012 for now.

Despite the continued strength in economic data, the odds of a pause in the rate hiking cycle at the policy meeting later this month are rising due to both global recession fears as well as government policy direction. In a surprising turn of events, the central bank announced that it will significantly alter the current core inflation target range of 0.5% to 3%.

Deputy Governor Atchana has said the Bank of Thailand will present the revised target to the Finance Ministry early this month. The mid-point of the present target range is 1.75%. Should the new target range employ a limit higher than 3% or a mid- point much higher than 2.5%, it would cement the argument for a pause in the rate hiking cycle.

While there are merits to pausing at the next policy meeting due to global market jitters, at a time when fiscal policy is very expansionary, monetary policy independence as well as counter-balancing fiscal policy becomes all the more important. Clearly, the recent developments and news flows do not provide comfort in this regard.

As such, despite prospects for growth to better consensus expectations in the near-term, and ample support from fiscal policy in the year ahead, the outlook is muddied by the unsustainable trend of current policy direction, with the odds that the eventual consequences are inflation and erosion of domestic competitiveness rather than growth.