Thai GDP Shrinks in 4th Quarter, Ups 2012 Forecast

Thailand's economy shrank a record 10.7 percent in the fourth quarter, much worse than expected, due to devastating flooding but it is expected to bounce back sharply this year as the government and major exporters step up reconstruction spending after the disaster.

Getty Images Thais wade through the waters on a downtown street as flooding causes havoc October 9, 2011 in Ayutthaya, Thailand.

Some economists said the worst performance on record in the final quarter of 2011 supported the case for another policy rate cut by the central bank at its next meeting on March 21 but others expect it to be left unchanged at 3 percent.

Growth in 2011 was just 0.1 percent, dragged down by the country's worst flooding in half a century that damaged farmland and inundated big industrial zones in October, hitting thousands of factories the car and electronics in particular. Many of the affected firms are still shut and may take awhile to reopen.

"Post-flood demand plus government spending for post-flood restoration should be able to support the economy to a certain degree," said Pimonwan Mahujchariyawong, economist at Kasikorn Research, adding investment from the private sector would also be supportive to growth.

Kasikorn Research's Pimonwan, however, expects rates to stay on hold until the end of this year.

The Bank of Thailand cut its policy rate in January and November to help the economy get through the floods, but it has said the current rate of 3 percent is supportive for growth. It has said there are upside risks to inflation.

"The data does show a negative surprise, but the market should not be too concerned about it ... What we should be concerned with is how the rebound this year will shape up,"  said economist Nuchjarin Panarode of Capital Nomura Securities.

"We believe the data has implications for a further rate cut at the central bank's next meeting in March," she said.

Worse Than Expected

The 10.7 percent quarterly contraction compared with the 7.8 percent fall expected in a Reuters poll. On a yearly basis, the economy also contract 9.0 percent, worse than economists' forecast of 5.5 percent.

The agency said the real flood impact last year had been much worst than expected, with the damage about 328 billion baht ($10.7 billion), or 3.7 percentage points of GDP.

In contrast, the Philippine economy grew 3.7 percent in the fourth quarter from a year earlier, while Malaysia's annual growth was 5.2 percent in the final quarter, albeit slowing from the previous three months.

The baht

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2012 GDP Forecast Raised

The National Economic and Social Development Board (NESDB), which compiles the GDP data, said it expected the economy to expand 5.5-6.5 percent this year, rather than the 4.5-5.5 percent projected in November, helped by public investment on flood defenses and economic policies, including wage increases. This economic boost could add to inflationary pressures.

"Q1 (GDP) will definitely be positive but not much as factories have just recovered. But Q2 will be much better," said Arkhom Termpittayapaisith, secretary-general of the National Economic and Social Development Board (NESDB), told a news conference.

That compares with the 4.9 percent growth forecast by the central bank earlier this month and the 4.2 percent predicted in a Reuters poll last week.

Although the flooding is over, manufacturing may not fully recover until the third quarter of this year, meaning exports will remain weak in coming months as industrial goods account for about 65 percent of shipments.

The agency trimmed its export growth forecast to 17.2 percent for this year from 19 percent forecast earlier, and compared with the 7.8 percent growth projected by the central bank in the face of faltering global demand.

The NESDB kept its headline inflation forecast at 3.5-4.0 percent for this year.