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26 May 2009

Thailand economy seen hitting bottom

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Thailand's economy slipped into its first recession in a decade in the first quarter as household consumption and investment slumped the most in years, but analysts and officials predicted a pick up in the economy in coming quarters, reported Reuters.

They suggested 2.5 percentage point cuts in interest rates by the central bank since December and spending under the government's 1.43 trillion baht ($42 billion) stimulus plans would underpin the economy in the rest of the year.

However, the main economic risk would be an escalation in a political standoff now in its fourth year that has already helped drive consumer confidence to a seven-year low.

"The economy should have bottomed this year in the first quarter if there are no further negative political developments in the rest of 2009," Ampon Kittiampon, the head of the state planning agency that released the data, told reporters.

"We might see no further contraction on the quarterly, seasonally adjusted basis in the second quarter if the government implements all its stimulus and investment plans that have been announced," he said.

Markets showed little reaction to the data. Bond yields edged higher and stocks .SETI and the baht were largely steady.

Gross domestic product fell a seasonally adjusted 1.9 percent in the first quarter from the fourth quarter leaving the economy 7.1 percent smaller than in the first quarter of 2008, the data showed.

The quarterly contraction was much smaller than the 6.1 percent slump in the fourth quarter as the biggest fall in household consumption in a decade and the biggest slide in investment in fixed assets in almost nine years were countered by growth in construction, agriculture and services.

Two quarters of falling GDP is the common definition for recession.

Government consumption dropped 6.6 percent in the first quarter, the most in two years, data from the National Economic and Social Development Board (NESDB) showed, suggesting limited spending so far to shield the economy from the global slump.

The decline from a year earlier was driven by a slump in inventories, which contributed 7.5 percentage points of contraction, more than offsetting a pick up in exports, which contributed 5.2 percent to growth.

Both the annual and quarterly falls in gross domestic product were deeper than expected and prompted the NESDB to revise down its expectations for 2009 GDP to a fall of 2.5-3.5 percent, which would be the worst economic performance since 1998.

"The sharp inventory drawdowns in the first quarter were done by factories that stopped importing materials as exports collapsed," economist Pimonwan Mahujchariyawong of Kasikorn Research Center said.

However, she said commerce ministry data for April showed the fall in imports of industrial materials, including electronic parts and accessories, was getting smaller. That suggested some inventories were being rebuilt, she said.

Last week, the Bank of Thailand suggested it had done enough to support a recovery in the economy. It decided to leave its policy rate unchanged at 1.25 percent, surprising markets which had expected the fifth rate cut in a row.

"We think the central bank's policy rate is going in the right direction. The economic driver for the rest of the year should rely on government spending," economist Nuchjarin Panarode of Capital Nomura Securities said.

However, Ramya Suryanarayanan, an economist at DBS Bank in Singapore, suggested weakness in consumer and investment spending in the GDP data could point to more monetary easing.

"The disappointing data this morning raises the odds that the central bank will cut rates again by 25 basis points. It's not just the headline number that's disappointing. It's also the breakdown," she said.

Reflecting government spending plans, the NESDB forecast that public consumption would rise 11.3 percent this year, after a rise last year of just 0.4 percent.

On the other hand, it said private investment would slump 9.7 percent after rising in 2008 by 3.2 percent.

Investment confidence has been undermined by the political crisis. Prime Minister Abhisit Vejjajiva has tried to reassure foreign investors the government is seeking reconciliation in the crisis, now in its fourth year since street protests against former leader Thaksin Shinawatra led to his ouster in a coup.


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