Monthly Economic Bulletin (September 2022)

Global: Bracing for higher interest rates

Global manufacturing activity posts slowest growth in 2 years; production could drop in coming months; high inflation points to further rate hikes

US: Robust labor market and still-hot inflation suggest aggressive policy tightening; stronger signs of decelerating economic growth might prompt slower rate hikes in Q4 

 

Eurozone: Intensifying energy crisis is pushing up inflation, which might prompt further aggressive monetary tightening; growth outlook is dimmer

China: Some gains from stimulus measures but recovery remains fragile due to weaker global demand and possibly renewed restrictions in some cities under zero-Covid policy

Japan: Economic recovery remains weak in Q3 amid covid wave; global headwinds could cap growth despite relaxing restrictions for inbound tourists and easing supply disruption

 

Thailand: Strong recovery in tourism despite greater headwinds

Krungsri Research Forecasts for 2022

 

Tourism sector: Foreign tourist arrivals projected to exceed 10 mn in this year after registering 1.5 min in August

 

Export growth decelerated due to weaker demand from US, China and Japan, but exports to ASEAN countries remained strong

 

Export volume fell in July, the first contraction in 17 months; current account deficit is the worst in 9 years

Given the slowdown in trading partners’ economies, export value rose in July because of higher prices but at slower pace than in 1H2022. Export volume fell for the first time since March 2021. Income from travel picked up in July, driven by rising foreign tourist arrivals, which exceeded 1 mn. However, services expenditure surged because of higher transportation costs; these led to the large current account deficit. For 2022, Krungsri Research forecasts current account deficit would widen to USD16.5 bn from USD 11 bn in 2021.

Manufacturing production improved for some goods, especially those targeted at domestic demand; export-oriented industries remained weak

Manufacturing production grew at a slower pace of 6.4% YoY in July, but on a monthly basis, it fell from June and for the second straight month. Overall, capacity utilization rates in some industries remained below pre-pandemic levels, led by automotive, medical, electrical appliances, and HDDs. That for machinery and jewelry have exceeded pre-Covid levels. Looking ahead, manufacturing output would face headwinds triggered by slowdown in trading partners’ economies as they tighten monetary policies to contain inflation and a downturn in China’s economy due to lockdowns in several cities under its Zero-Covid policy.

Private investment will recover slowly amid higher energy prices and minimum wage

 

Smaller FDI inflow in 1H22 could reflect weak recovery in private investment; benefits of reopening and recovering tourism may attract FDI in 2H22

Private consumption: Despite higher cost of living, domestic spending would rise following recovering tourism industry and supportive measures from the government 

In July, private consumption index rose 14.7% YoY but edged down 0.2% MoM. There was growth in all items in line with higher household purchasing power as result of rising employment and farm income and improving consumer confidence. For the rest of the year, although consumption will face headwinds such as high inflation, there will be tailwinds to mitigate the negative impact, including government aid for welfare card holders and the Co-payment scheme. Such measures are expected to inject almost THB50 bn into the economy. There is also support from a stronger recovery in tourism activity with the improving  COVID-19 situation and relaxation of containment measures. Krungsri Research now projects private consumption would grow by 4.7% this year instead of 4.2%.

Headline inflation could have peaked in August; higher core inflation might prompt MPC  to raise policy rate further but gradually given the still-fragile economic recovery

 

Impact of minimum wage hike on Thai economy

 

Minimum wage is set to increase, in line with long-term trend

The minimum wage was last raised in January 2020 to a range of THB313-336 a day (+1.6%) from THB308-330 a day in 2018. On 26 August 2022, the Tripartite Wage Committee agreed to raise the minimum daily wage by 5.02% to THB 328-354 effective October 1, 2022. The increase this year is in line with its long-term trend.

Purchasing power will improve in key economic and industrial areas

There are nine levels of new minimum wage with increments of THB 8-22 or rising by 2.5-6.6%. The highest rate would be THB354 (rising by THB 18-19 or 5.4-5.7%) in Chonburi, Rayong and Phuket, followed by THB353 (rising by THB 22 or 6.6%) in Bangkok and surrounding provinces. The lowest rate would be in Yala, Pattani and Narathiwat, Nan and UdonThani, at THB328 (up THB 8 or +2.5%).

Comparison with CLMV: Wage gap between Thailand and CLMV is narrowing

In the past decade (2012-2021), Thailand’s minimum wage in US dollar had risen by an average of 3.8%, slower than that in CLMV region. But the gap between Thailand and CLMV is narrowing. In 2022, CLMV countries - except Myanmar - have raised minimum wage. Laos’ minimum wage in local currency has increased by 9.1% to 1.2 million Kip, starting August 1. Vietnam raised regional minimum wage by around 6% to VND 4.68 million from July 1, 2022. In Cambodia, minimum wage for regular workers have been raised by 1% to USD 194 per month from January 2022 (USD 192 in 2021). In Thailand and Laos, the weaker local currencies would cause their minimum wages in US dollar to fall this year.

Main sectors which hire minimum wage labor are agriculture, construction, hotel & restaurant and manufacturing, especially SMEs

The employment of minimum-wage workers in agriculture and construction sectors reached 79% and 43% of total workers, respectively. Pre-covid, output of both sectors accounted for a combined 9% of GDP, mainly contributed by SMEs. The share of minimum-wage workers in hotel & restaurant and manufacturing sectors exceeds 30%. Output of both sectors accounted for a combined 33% of GDP, led by manufacturing (27.8% share).  In the manufacturing sector, both SMEs and large-scale businesses employed minimum-wage workers.

Within manufacturing sector, SMEs mostly employ the largest share of minimum-wage workers

Within the manufacturing sector, only the Leather industry (0.4% of GDP) had more than 50% of minimum-wage workers within their workforce, especially large firms. In SMEs, minimum-wage workers in many industries accounted for more than 40-50% of employees, led by those in Wood (53%), Food (51%), Non-metallic (50%), Beverages (49%), Textiles (48%), and Rubber & Plastics (47%).

Appropriate timing for wage hike?: It is time to hike wages as labor productivity has improved by 2% while unit labor cost has dropped by 2.7%

 

A 5% minimum wage hike would lift production costs by 1.4%, comprising 0.2% direct effect and 1.2% indirect effect 

The most affected sectors would be business activity & real estate, construction, mining and manufacturing. Within the manufacturing sector, the increment would be highest for leather, furniture, beverage and wood products manufacturers.
 

Production costs would rise in labor-intensive sectors because of the minimum wage hike and would also rise overall due to higher input costs

The direct effect of wage hike on production costs would be much less than the indirect effect, which means the minimum wage hike would lift production costs not only in labor-intensive sectors but also other sectors as a result of higher input costs triggered by higher wages. For example, the chart below shows the wage hike would lift production costs in real estate and construction sectors more than in the agriculture and education sectors even though labor intensity in real estate and construction sectors is less than in the agriculture and education sectors.

Higher inflation: Small industries would see larger increments in production costs; lift baseline inflation by 0.46%