The Thai economy is expected to miss the country's potential growth level of 2.5-3% over the next two years, says Bank of America (BofA), noting that the ongoing recovery remains "limited and uneven" while energy supply shocks and price volatility persist.
In recent research by BofA Securities, the corporate and investment banking division of BofA reported that Thailand's economy has improved sequentially, but the recovery remained limited and uneven.
"Recent high-frequency data suggest the Thai economy improved sequentially in May after being hit by rising energy costs in April, although the recovery remained limited and uneven," BofA said in an Asean macro roundup jointly prepared by emerging Asia economist Pipat Luengnaruemitchai.
With year-on-year growth accelerating, the improvement was driven mainly by durable goods, particularly electric vehicle sales, while non-durable and semi-durable spending remained subdued. Weaknesses in automobiles and food and beverages outweighed modest growth in electronics-related output.
"Despite strong electronics exports, domestic production growth slowed sharply, highlighting limited domestic value-added. Meanwhile, the current account remained under pressure with a US$6.4-billion deficit," noted the report.
Looking ahead, tourism should improve if long-haul demand continues to recover, while the El Niño weather pattern remains a downside risk to agricultural production.
The current account should improve as lower energy prices reduce fuel imports, but it is likely to remain thin amid strong capital goods imports and slowing non-electronics exports, according to the brokerage.
While the US-Iran ceasefire led to a reversal of supply shocks, modestly improving the growth outlook, it is unlikely going to trigger a reversal in policy expectations in Southeast Asia given the renewed volatility in energy prices, noted BofA.
Inflation risks remain elevated due to the lagged pass-through of revived energy shocks alongside weather-related disruptions and second-round effects of higher energy costs, said the brokerage.
BofA said the Bank of Thailand is willing to look through short-term, supply-side shocks, given the weak domestic demand and low underlying inflation.
The central bank sees foreign exchange as a shock absorber, but a sharp depreciation of the baht could raise imported price inflation and "force the Bank of Thailand to react".
"Raising the federal funds rate would not necessarily force the Bank of Thailand to hike its rate unless there is a rapid capital outflow or a weaker baht," said BofA.
