Thailand's recovery following floods on track

Manufacturing production in May bettered expectations and expanded by 5.5% YoY, says DBS Group Research.

DBS Group Research noted:

Customs trade data and manufacturing production data for May suggest the recovery from the floods remains on track despite a more mixed March / April and despite a deteriorating global backdrop. Balance of payments basis trade data, volume based trade data and domestic demand data are on tap today. These are expected to mirror the available data for May and suggest domestic demand remains above-trend while export volumes continue to recover.

Without taking into account data revisions, manufacturing production in May bettered expectations and expanded by 5.5% (YoY) and 70% (MoM, saar), against a rise of 18% (MoM, saar) in April and a 36% (MoM, saar) drop in March. As it happens, April production has been revised down and fell by 15% (MoM, saar).

Thus, production grew by a larger 100% (MoM, saar) in May. With that, 2Q quarter-to- date production is 18% (saar) higher than 1Q level. This suggests GDP growth remained above trend (of 4% QoQ, saar) in the second quarter following first quarter’s surge of 44% (QoQ, saar), which reversed an equivalent drop in 4Q11.

While production could drop in June, such will hurt third quarter production and GDP growth more than second quarter growth (for arithmetic reasons). As such, assuming manufacturing GDP growth underperforms the higher frequency production data (as it didn’t fall as hard as the latter), GDP growth appears on track for our projection of 5.5% growth in 2012. While this is above-trend, this growth comes off a low base in 2011 (0.1%) and is clearly insufficient.

Government policies to boost growth remain biased towards boosting consumption artificially through wage hikes and subsidies. While the government aims to stimulate investment also, the main strategy is to lower corporate income tax rates sharply in 2012 and 2013, rather than to raise productivity growth (via higher infrastructure and education spending, for example). This approach usually is not sustainable and risks inflation.