Most economic research houses, both government and private, predicted that Thailand would experience GDP growth of 3.5-4% this year. Even the Joint Standing Committee on Trade, Industry and Banking, an organization representing Thai business entities, backed the range.

Growth will come from three factors: first, recovery from two slow years of weak growth; second, the reduced impact of the Omicron variant and the high vaccination rate; and finally, global economic growth. The last time the Thai economy recorded 4% growth was in 2018.

All of these projections were made before the International Monetary Fund (IMF) cut its outlook for global economic growth for 2022 from the 4.9% it forecast in October 2021 to the 4.4% it forecast last month.

This downward revision of half a percentage point was mainly due to revised growth forecasts for the United States (down 1.2%) and China (down 0.8%).

Since they are our two main trading partners, which account for 29.1% of our exports, it is natural that we should also be revised downwards accordingly.

For those who may not make it to the end of this article, I’ll cut to the chase: my estimate for Thailand’s growth this year is much less optimistic — not 3.5% but more like 1. 6%. I have five reasons why.

No 1: high inflation rates. Consumer prices rose 3.23% in January, from 2.17% a month earlier. This may seem modest compared to the 5-7% rates seen in some other countries. But let me tell you this. Thailand’s rough inflation cycle has just begun.

In the same month, producer prices jumped 8.7%, well above the rate of consumer price inflation. A survey of CEOs by the Federation of Thai Industry indicates that manufacturers will be able to maintain current product prices for up to 1-2 months. After that, this high level of inflation will be transferred to consumers. In the same survey, 35.3% of respondents think high inflation will last three to six months, while 34.7% think high prices are here to last six to 12 months, and 30% think that high inflation will last a year or more. Following.

I agree with the last group. I’m not too pessimistic. It’s just that this vicious circle of inflation is just beginning. Prices rise first in the production sector and are then passed on to consumers. Consumers, who are also wage earners, will then demand higher wages to help pay for the rising cost of living. Higher wages will, in turn, increase production costs. The cycle continues again and again.

The theoretical solution is to nip this in the bud by raising interest rates and cutting government spending to suppress demand before rising producer costs are passed on to consumers. Moral suasion (advocacy) for producers to maintain their (lower) prices can never be seen as a permanent solution. Inflation retards economic growth by reducing consumption. When inflation is 5%, consumers are forced to consume 5% less. If growth of 3.5 to 4% were to be achieved assuming 5% inflation, wages would have to be adjusted upwards by 8.5 to 9.% to compensate for these price increases.

No 2: high interest rates. Jerome Powell, the chairman of the US Federal Reserve, after realizing that inflation is unlikely to be temporary, is now proposing interest rate hikes. A median forecast from US analysts indicates that the Fed is expected to raise the federal funds rate three times, taking it from 0.25% now to 0.75-1% by the end of this year. The Bank of Thailand will have to follow suit for fear of capital outflows. At the end of 2021, foreign investors held 1.03 trillion baht of Thai debt instruments. This amount of money cannot be allowed to leave the country to seek higher returns elsewhere.

On the other hand, higher interest rates will slow down the economy due to the increased cost of borrowing. I’ll give you a simple rule. Every 1 percentage point increase in the interest rate will slow GDP growth by 1.75%. The IMF lowered its forecast for US economic growth by 1.2% as the agency assumes the Fed will raise interest rates by 1% this year.

No. 3: Fall in per capita income. It amuses me to see economists assume that consumers will rush to consume once the pandemic is over or under control. The desire to consume is certainly there, but people’s wallets do not cooperate. If we compare pre-Covid (Q1 2019) income levels with those of the third quarter of last year, we can see that Thai consumers earned 14.5% less due to the economic contraction due to the coronavirus. ‘epidemic. This is calculated based on real GDP data.

With far less income to spend, how will consumers be able to return to their pre-Covid level of consumption? Higher levels of consumption can only happen on one condition: the government kick-starts the economy this year by running a larger budget deficit than seen in 2020 (1 trillion baht) and 2021 (1.5 trillion baht). baht).

Which brings me neatly to obstacle #4: a cash-strapped government. The good news is that the law defining the borrowing ceiling has been amended and the public debt ceiling has been raised to 70% of GDP. Of course, the ceiling can be raised again by modifying the law on budgetary discipline again. The bad news is that tight domestic liquidity will prevent the government from borrowing as much as it wants.

In the last fiscal year, the government borrowed 1.5 trillion baht to stimulate the economy. The figure for this exercise could be less than 1 trillion baht, which would have a considerably lower impact. Why?

Please read Obstacle #5: Restricted Domestic Liquidity (I saved the best for last). The domestic money market kicked off 2021 with 658.2 billion baht of excess liquidity available for anyone to borrow. So the government borrowed and borrowed as if the cash was inexhaustible. This demand for money, with no new inflow of capital from abroad, caused excess liquidity to end the year at negative 329.4 billion baht on December 31.

Negative excess liquidity immediately triggers a liquidity crisis. It will lead to a serious crisis if the situation persists for a long time. Moreover, without excess liquidity, banks must wait for customers to repay their loans before they can lend that money to the government again. Economists have a technical term for this phenomenon. We call this “crowding out”, and it is not recommended because the government takes cash from the more efficient private sector. With these five hurdles in mind, it’s hard for me to predict a prosperous year ahead. In fact, my 1.6% growth projection may even be too optimistic.