Thailand's economic growth slows on supply chain woes

Thailand's economy shrank because of the tsunami and earthquake in Japan

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Thailand's economic growth slowed in the second quarter due to supply chain disruptions caused by the earthquake and tsunami in Japan.

Growth was 2.6% in the three months to the end of June, from a year earlier, down from 3.2% in the first quarter.

Compared with the previous three months, the economy shrank by 0.2%.

The destruction in Japan resulted in a shortfall in parts for manufacturers in Thailand, especially for auto makers, which hurt exports.

"The net exports position remained a drag as expected, with the post-quake impact on the manufacturing sector weighing on the economy's performance." said Radhika Rao of Forecast Pte.

Foreign vs domestic demand

Start Quote

The data could see the newly elected government pile pressure on the Bank Of Thailand to rethink its aggressive policy approach”

End Quote Radhika Rao Forecast Pte

Thailand's exports are one of the biggest contributors to the country's economic growth. But as key markets like the US and Europe face a slowdown in growth, analysts said the Southeast Asian economy may witness further slowdown.

"A key downside risk to growth is slowing global demand due to debt problems in developed countries, which is likely to weaken Thailand's export growth." said Usara Wilaipich of Standard Chartered Bank.

However, analysts said robust domestic demand will continue to fuel growth.

"You still do have some domestic buffer coming in terms of consumption and investment," Wellian Wiranto of HSBC told the BBC.

Analysts said that higher incomes in the agricultural sector and the restoration of consumer and business confidence due to political developments in the country were among the key factors driving domestic demand in the country.

"Overall we still see the economy expanding," HSBC's Mr Wiranto added.

Policy change?

While economic growth in Thailand has led to increasing domestic demand, rising consumer prices have seen the central bank tighten its monetary policy in the past year.

The Bank of Thailand has raised benchmark interest rate eight times since July 2010, with the latest hike taking the cost of borrowing to 3.25%.

However, analysts said the weaker-than-expected data may force the central bank to change its stance.

"The data could see the newly elected government pile pressure on the Bank of Thailand to rethink its aggressive policy approach," said Forecast Pte's Ms Rao.

The central bank is expected to meet later this week to decide on monetary policy.

Ms Rao added that even though she expected a rise in the cost of borrowing, she "will not be surprised if the central bank cites global volatility and soft Q2 GDP to sit on their hands this time around."

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