Big Read – Economists warn to fasten seat belt as roller coaster ride of synchronized recession set to rock global economy

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Thais hoping to see the country’s economy turnaround may have to possibly reconsider their views amid continued negative news from across the world and instead look at possibly tightening their belts.

“Even though Thailand’s economy is on the path of recovery, but if the external factors are not conducive, then the recovery would be more difficult and longer,” Pipat Luengnaruemitchai, chief economist at KKP Phatra said.

“Therefore, I would recommend everyone to wear your safety seat belt.”

Pipat, one of the eminent economists in the country, came out to say after the economic data from the United States were released over the weekend which showed that the US economy went into another quarter of negative growth. On July 28th the United States released its 2nd quarter gross domestic product (GDP) numbers which showed that the world’s largest economy shrank by 0.9% during the 2nd quarter ending June 2022, thus putting the US economy in ‘technical recession’.

A technical recession is when the country’s GDP dips for 2 consecutive quarter and this is the case with the United States which saw its 2nd quarter GDP come in at -0.9% compared to the previous quarter, after a -1.6% seen during the 1st quarter of this year.

The announcement of a negative growth came within hours after the US’ Federal Reverse Bank announced that it was raising the rates by yet another 0.75% (75 basis points) after having raised the rates by 0.75% in the previous meeting in June and 0.50% in May this year.

The main reason is the negative of investments including a decrease in inventory and a slowdown in government spending after the start of the withdrawal of economic stimulus while consumption and exports continued to grow well, but all there are signs of slowing down, Pipat said in his comment on his social media.

Jobful Recession

The headline numbers in the United States are showing every sign of possible recession but this ‘recession’ is looking a little weirder than others as the US continues to add new jobs and payroll are continuing to recover to pre-covid levels.

Fed Chief Janet Yellen pointed that the job market continued to remain strong and that could be a reason to believe that the US economy is not in a broad slowdown as many would expect it to be. The US is on track to suprass the pre-covid payroll count this month, just 30 months after the virus attack. Similar return took 76 months (more than 6-years) during the 2008 recession and 48 months (4-year) during the 2001 recession.

The labor market remains strong. The US’ unemployment rate was just 3.6%, much lower than in the past. Employment numbers continue to increase. Everyone who is looking for a job and there are job openings across with wages rising.

Consumers continue to spend, and payroll continues to see wage hike, which prompts many to think that unlike in the past this recession is ‘Jobful’ recession rather than ‘jobless’ recessions that the world is so accustomed to seeing in the past.

The nearly US$681 billion spent in the month of June in retail and restaurants in the United States clearly tells a different story to the gloomy numbers and that could be the reason why the National Bureau of Economic Research (NBER) has yet to call US to be in a recession.

In the past the NBER has made calls of recession without 2 consecutive quarters of recession (as is the cast this year) but in 2022 the NBER has yet to make a call that the US is in recession despite the country being in ‘technical recession’.

Since 1948, if the US GDP has contracted for 2 consecutive quarters, the NBER has always declared that period a recession, and in 2001 dotcom bubble burst, the NBER called for recession even before the 2 consecutive quarter showed negative growth.

“Therefore, I believe that the US economy that contracted in the first half of the year is not likely to be a recession,” Pipat said.

Pipat Luengnaruemitchai

China & Other Factors

The technical recession in the United States is not the only concern. China, the world’s 2nd largest economy, is already in a situation that is not expected of the goliath in the north.

China, which has been the source of robust economic growth for Thailand as it imports a lot of goods and services, while at the same time (until Covid-19 hit) a major source of tourism revenue, has started to show signs of strains.

The country that is the world’s most populous nation, saw its GDP for Q2 drop to a mere 0.4% which was well below the 1.2% expected and far below the 4.8% it recorded during the Q1 of this year.

To make matters worse, China’s factory activities during the month of July fell to 49 from 50.2 seen in June. The National Bureau of Statistics said on Sunday that the official manufacturing purchasing managers index fell against the anticipated rise that analysts had predicted. A reading above 50 is an indication that activities have picked up from the previous month, while a reading below 50 is an indication of contraction of activities from the previous month.

The non-manufacturing gauge, which measures the activities of construction and services sectors, also saw a decrease from previous month of 54.7 to 53.8. Again this was below analysts forecast of 53.9.

Europe, another key market for Thailand’s export and tourism sector, also has been witnessing not that good data coming out, especially from the Europe’s largest economic powerhouse – Germany.

Data from Germany showed that the country’s economy during Q2 remained flat, although the GDP of the 19-nation grouping saw a 0.7% growth, ahead of the 0.2% estimated by analysts.

Synchronized Recession

The recession that is on its way could be what economists call it as ‘synchronized recession’ meaning all economies would likely head towards recession.

With recession on the horizon, exports, which account for nearly 60% of Thailand’s GDP will likely suffer as demand for goods and services are likely to see a contraction.

Data suggest that Thailand’s export destinations were mostly to the countries that are all experiencing recession.

Thailand’s export to United States accounted for 15% of its total exports in 2021, while China and European Union accounted for 14% and 9% respectively.

If a synchronized recession in all these 3 key markets were to be a prolonged one, it would mean that 38% of all of Thailand’s exports would be impacted immediately.

Export by Country 2021

In such a situation, one of the key drivers of Thailand’s economic recovery could be hampered and it is the reason why belt tightening is the new theme.

Thammarat Kittisiripat, economist at Tisco Securities, says that exports have been impacted due to higher-than-usual prices of energy and commodities (due to the Russia-Ukraine war) had boosted the export performance of price-sensitive products, including metal & steel and agricultural products.

He said that Thailand as a net exporter of food products, was benefiting from the rise in global food demand after many countries suspended exports of food products, mostly until yearend, to avoid domestic food shortages.

“However, weakening of global demand is expected in the periods ahead, corresponding with high inflation and rising interest rates. We note here that the IMF has slashed its global GDP forecast for 2022-23F to 3.2% (vs. 3.6% previously) and 2.9% (vs. 3.6% previously), respectively,” he said.

The IMF he said, was more concerned about economic slowdown, especially from financial turbulence in emerging markets following the Fed’s rate hikes.

Such a slowdown represents downside risk to exports, particularly products with high market concentration to those vulnerable emerging markets. That said, Thailand has overall low exposure to such countries. Hiccup from Russia-Ukraine supply disruptions remains a factor as we have seen a big slump in exports to those two countries.


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