Thailand's 2.6% GDP in Q2 2011 disappoints expectations

Second quarter GDP yesterday disappointed expectations coming in at 2.6% (YoY), a full percentage point below market expectations. In sequential terms, output contracted by 0.8% (QoQ, saar). The expenditure breakdown shows private consumption contracted by 1.3% (QoQ, saar), against a trend (or normal) rate of growth of 3% (and despite a rise of 4.5% suggested in higher frequency data).

While exports too contracted in sequential terms, this is largely a payback for a strong 1Q – something that cannot be said for consumption. Meanwhile, the industry breakdown shows non-agriculture non-manufacturing GDP (50% of overall GDP) – also a very stable component comprised largely of consumption of services – was down by 4.5% in the quarter. Manufacturing also contracted by 2%.

A contraction in consumption normally doesn’t bode well for broader economic growth as consumption is the final demand in an economy. A contraction in services sector (if not reversed) is also worrisome as it is the most stable sector in the economy. Non-agriculture non-manufacturing GDP last contracted in 2H08 in the aftermath of oil price spike / Lehman failure and in 2Q10 when street protests in Bangkok turned bloody.

However, temporary factors – the sharp surge in oil prices in 1H11 and the hit to supply-chain and production from the natural disasters in Japan – clearly played a role in dragging down 2Q GDP. A reversal of these factors should normally point to strong third quarter growth (but these are hardly ‘normal’ times).

Oil prices are now much lower, especially in seasonally adjusted terms (Brent crude at USD 100 / bbl seas/adj in 3Q-to-date vs USD 115 / bbl in 1H11) and this points to some respite for consumption. Vehicle sales fell off the cliff in April and May and have rebounded by 50% (s/a) from the bottom in June and July. The auto sector has a weight of 6% in the valueadded manufacturing production index (2000 base).

Assuming the entire drop in vehicle sales relates to disruptions from Japan, the hit from Japan shaved 2.5%-points off sequential GDP growth. Considering spillovers and linkages to other sectors, as well as an increase in the weight of the sector if adjusted for the growth in the auto sector since 2000, the impact was probably even larger. As Japanese data have clawed back some 80% of the disasterrelated drop in production, a strong start to the third quarter appears on the cards. Indeed, some of this “payback” is already in the bag.

Industrial production rose by 9% (MoM, sa) or 108% annualized in June. Assuming a trend or normal rate of growth in July (6% annualized), this points to about a 30% (QoQ, saar) rise in manufacturing in 3Q and 15% rise in GDP in 3Q – sufficient to bring full-year GDP growth to our forecast of 5%. Whether this actually plays out or not is highly unclear at the moment.

As the post Lehman economic crisis made plain, fear of a meltdown can lead to a fall-off in business spending and a self-fulfilling slowdown (even when fundamentals are sound as it was in the case of Asia, apparent from the V-shaped recovery that ensued). For the moment, this fear is the biggest downside risk to 2H11 growth, and for this reason, the policy decision at the central bank policy meeting tomorrow too is highly uncertain – even though the majority including DBS is looking for a 25bps rate hike.