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As the Thai economy slides into recession, people are curbing their spending. This is proved by the figures for consumer prices, which fell for the second month in February. Prices dropped 0.1 per cent from a year earlier, after dropping 0.4 per cent in January.

The non-food consumer price index registered deflation of 6.4 per cent year on year in February following a minus 8 per cent year on year figure in January, which underpinned sustained marginal deflation in February. These tariff adjustments failed to offset the decline in the consumer price index for housing (which includes the consumer price index for liquefied petroleum gas), which fell by 5.1 per cent year on year, while the CPI for transportation declined by 12.3 per cent year on year in June.

The good news is that food inflation in February (9.1 per cent year on year) climbed down from double-digit highs. Pressure dissipated in the key price indices for fruits and vegetables (4.5 per cent year on year), meat, poultry and fish (7 per cent year on year) and food prepared within households (9.5 per cent year on year). However, the consumer price index for rice and cereals remains elevated at 22.8 per cent year on year during the month.

The one-off electricity rate/oil tax tariff rate adjustments directed at the prices of liquefied petroleum gas, gasoline/diesel price rates, and electricity rates, won't change the underlying deflation trend for the core consumer price index, but it may restrain rapid compression of the non-core consumer price index.

So are we facing a deflationary spiral or are these price drops temporary?

Thai policy-makers have argued that Thailand is not going into a deflationary trend because the price drops are due largely to a fall in oil prices. Siripol Yodmuangcharoen, permanent secretary for commerce, said that Thai purchasing power shows that prices are not deflated. He said that of more than 400 items the Commerce Ministry is monitoring, only 90 have suffered from declining demand.

Still, there is a growing risk that the Thai economy will contract this year. This has forced monetary officials to cut the policy rates rather aggressively. Bank of Thailand policy-makers have cut borrowing costs by 2.25 per cent in three meetings since December, bringing the central bank's policy rate down to 1.50 per cent. The Bank of Thailand will next meet on April 8, and it might be forced to trim the rate again if the figures look bad.

CitiGroup expected that Thai policy-makers may still be looking at another 25-50 basis points rate cut when they meet in April. But it reckons that Thailand may be nearing the end-phase of the rate-cutting cycle.

"The BOT's preference for nominal exchange rate weakness since February, but in line with regional currency weakness, would help take the policy lead in promoting its accommodative bias assuming the policy rate easing cycle ends soon," CitiGroup said.

The Thai economy started to head downward from November last year, accentuated by a collapse in the manufacturing sector in December. January figures continued to worsen, leaving most economists to forecast that the economy would contract in the first and second quarter.

Finance Minister, Korn Chatikavanij has admitted that Thailand is going to see some nasty figures for at least the next month or two, with February and March reporting similar weakness. The largest contraction since 1982 in the US economy, Thailand's biggest single overseas market, has prompted exporters such as Charoen Pokphand Foods and local units of Toyota and Seagate Technology to predict lower sales and job cuts. Overseas shipments, which amount to 70 per cent of GDP, plunged 26.5 per cent in January from a year earlier.

Thailand's gross domestic product in the first quarter may shrink more than the fourth quarter's 4.3 per cent contraction, the government's planning agency said this week, putting the economy into its first recession in a decade. For the year, GDP may miss its 0 per cent to 2 per cent target. The baht fell 0.2 per cent to Bt36.23 per dollar yesterday, close to its lowest level in more than two years, while the stock market also headed downward.

The Abhisit government is propping up domestic demand to offset losses from net exports. It has introduced a huge stimulus package, which will only feed into the economy more visibly by the third quarter. But if the global outlook continues to worsen, there is a risk that Thailand will face a deflationary spiral.

But we all realise that there is a limit to what the government can do. The stimulus package is only designed to keep the economy afloat temporarily while waiting for the global economy to adjust. Once the global economy recovers, the government will reduce its deficit spending. The problem is that no one can say how long the world will suffer from the severe recession. If the recession, or even depression, is prolonged, the Abhisit government will have to adjust its strategy to gear government spending or investment into areas that will strengthen the country's foundations.