Economy needs Political impasse to be resolved

 At the same time, prolonged political protests have dented the confidence of people living in big cities.

They feel the economy has stopped growing as a result of the lack of confidence due to the reduction of household expenditures and the slowdown of investment.

But feelings can be different from reality.

In the first quarter of this year, the economy grew at a rate of 6 per cent, which was higher than that of every quarter of last year. This was due to the fact that while oil prices rose, the price of major food crops also increased markedly. Besides rice, the prices of rubber, tapioca, sugarcane, and palm oil also escalated quickly, resulting in a record increase of income for farmers around the country.

As farmers are relatively poor and many struggle to pay for the necessities for life, the additional income provides them with the means to acquire them. As a consequence, retail sales increased in real terms by 15.7 per cent in March over the same month last year.

More pronounced is the sale of motorcycles, which jumped by 17.8 per cent in March and 35.4 per cent in April. The increase in consumer spending contributed to an overall 2.6-per-cent increase of household consumption in the first quarter in real terms, which was higher than that of any quarter of last year. There is also the possibility that consumption up country could continue to rise even though household consumption in big cities may slow down because of the increase in oil and food prices.

Besides the increase in overall household consumption, private investment is another driving force for the economy at the moment.

Private investment growth, which was negative in the first half of last year and grew at a meagre rate in the second half, grew at the rate of 6.5 per cent in real terms in the first quarter of this year.

The import of capital goods increased at more than 15 per cent in real terms in the first quarter and was even higher at 17.6 per cent in April. These were brought in for capacity expansion by various industries.

However, certain facts indicating uncertainty of further expansion of private investment have started to appear.

An 8.5 per-cent fall in cement sales in March and even bigger drop of 18.2 per cent in April shows the effect of higher oil prices on production and construction costs. It is still unclear whether the fall in cement sales was due to real estate developers waiting for a clearer picture of their cost increases or because of a slowdown in investment. This remains to be seen.

Another indicator of movement in private investment is the Business Sentiment Index which had been rising continuously since the middle of last year up to March this year. It dropped suddenly in April - at the same time as the drop of consumer confidence index  - after increasing up until March.

Normally, a change in the index would not result in an immediate increase or decrease of private investment. It normally has a lead time of 3-6 months. If confidence falls temporarily and then bounces back, investment growth remains steady.

The question is, what factors led to the fall off in business sentiment from April. The surge in oil prices, which has a knock-on effect to production costs, does affect business sentiment. However, it should not be the main factor as oil prices have been going up for quite some time, yet private investment has continued to increase. Exports have been growing and household consumption has picked up. The main factor that really dragged down the Business Sentiment Index should be concerns over the political situation, where conflicts started to worsen in April and May.

Discussions with businessmen revealed their concern that the deteriorating political situation, as reported in newspapers, may get out of control. Their doubts on when and how the conflict would end and what could happen next made them nervous. At the moment, they have not stopped their investment activities. However, if the disagreements are prolonged and there is no clear sign of when they would be resolved, investment growth may slow.          

The faster the situation is normalised, the better it will be for the economy, since the private-investment growth would continue and consumer confidence would improve.

Thailand this year will depend more on domestic consumption and domestic investment to drive economicgrowth.

The country cannot depend on international trade as the economies of major trading partners are slowing down. The United States is now in recession, which has already caused a manufacturing downturn in Europe and Japan in recent months. The slowdown of major economies has affected the export of IT products in Asia, namely South Korea, Taiwan and China. There are also signs of a global manufacturing slowdown.

It is therefore necessary for Thailand to make sure that domestic consumption and investment can grow at their full potential. The government has to be careful in its measures regarding agricultural production. Mistakes as in the case of rice must not be repeated.

The price of crops still remains high, which pushes up household spending. It is also necessary to make sure that political disagreements do not expand into a conflict, which would certainly have a negative impact on investor confidence. If both sides can compromise and find a peaceful way to end their differences quickly, I believe business sentiment would recover and private investment would continue to grow.

Until next Monday.