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Thai politics is once again weighing on the economy. Investor confidence and a belief that December's election would bring stable politics helped boost domestic demand and send economic growth to 6 per cent year-on-year, versus 5.7 per cent in the fourth quarter of 2007. The prospects for the Thai economy in 2008 looked reasonable, despite inflationary pressure and higher oil prices, until this past weekend. As the People's Alliance for Democracy (PAD) began its fresh campaign to remove the Samak government, there are growing fears that Thailand may be lurching into another period of political turbulence similar to that of 2006.

Thailand suffered from incidents during the political crisis  in 2006 that led to a military coup and an interim government in 2007. During that time, investments stalled and confidence plummeted. The December election was not a new beginning, but rather it represented the continuation of a lingering rift between opposing forces in Thai politics that have yet to reconcile. Nobody is certain how the political conflict will be sorted out. But it is certain that opposing factions will not back off or try to reach any compromise.

The National Economic and Social Development Board (NESDB) has adopted a similar view. Before the PAD's rally over the weekend, the think-tank was of the opinion that the Thai economy could easily exceed 6 per cent growth this year, driven by domestic demand, exports and a pickup in investment. Now it is afraid that the PAD rallies and the political forces against the PAD might spill over into the economy, hurt business confidence and disrupt Thai growth.

The state-planning agency has also trimmed its forecast of the trade surplus from US$5.1 billion (Bt163 billion) to $1.5 billion. This can be attributed to slower global demand for Thai exports and also to higher import bills on oil products. Dr Ampon Kitti-ampon, the secretary-general of the NESDB, said the 2008 growth forecast could have been raised from 5 per cent to 6 per cent based on first-quarter GDP performance, but was left unchanged because of significant risks to the growth outlook.

The NESDB maintains a fallback position with its growth forecast for Thailand at the same level of 4.5 per cent to 5.5 per cent. The Thai economy grew at 4.8 per cent in 2007, one of the lowest growth rates in the Asia-Pacific region.

Stock market investors are also expressing their concern about the prospects of the political situation, hoping that rival forces can find a solution to their conflict.

Has the Thai economy peaked after the 6 per cent growth rate in the first quarter? "The growth momentum [on quarter] looks to have peaked out and we expect continued moderation over the coming quarters," says Goldman Sachs. Domestic demand recovery remains fragile, pressured by the prospect of higher inflation, while net exports should deteriorate ahead on the US-led global slowdown and higher oil import bills.

With inflation at 6.2 per cent in April, the Bank of Thailand might be tempted to raise its interest rate to curb the price pressure. As the oil price continues to rise, the central bank will have little choice but to tighten its monetary policy. It is still debatable when the central bank's hawks will step in. But it cannot afford to take an accommodating stance because inflation is eating away at the economy.

Assessing both Thai politics and the Thai economy is very complicated at this point, as politics has become another factor in economic growth.

The deteriorating political situation will weigh on business confidence, causing investors or companies to delay their investments. The Samak government, which held its first economic ministers meeting yesterday, is now looking at ways to boost the economy. The problem is that it does not seem to know how to steer the country out of the current political dilemma.