Despite economic uncertainty, Thai manufacturing finds opportunities in global decoupling

The US economic outlook for 2024 has significantly improved thanks to robust domestic demand. In Asia, China’s economy exhibits promising prospects from the manufacturing sector and economic stimulus measures, while India and ASEAN economies will continue their growth trajectory. On the other hand, the Eurozone and Japan are likely to experience subdued growth. In 2025, we expect a shift in global economic drivers.

ASEAN economies will continue to accelerate. India will maintain buoyant growth despite a slight slowdown. The Eurozone and Japan will improve with a modest rebound. In contrast, the US economy will experience slower growth, while structural issues in China will hamper growth. The global economy is expected to decelerate in the medium term due to emerging challenges, particularly China’s structural problems and escalating geopolitical tensions.

Upcoming elections worldwide this year will also heighten policy uncertainties for each country. Notably, the US presidential election in November could fuel uncertainties over global economic and trade policies, potentially deterring the global supply chain.

As inflation subsides, major central banks gradually cut their policy rates—led by the ECB and BOC. The Fed and BOE are expected to reduce policy rates in H2/2024, during which we anticipate another BOJ rate hike following an upward revision of medium-term inflation forecasts.

Based on the SCB EIC assessment, the Thai economy will slowly regain momentum, achieving 2.5% growth in 2024. The service sector will primarily drive the growth alongside an upbeat rebound in foreign tourist arrivals, supported by government initiatives such as free visas and visa-on-arrival (VOA), as well as the return of Chinese tourists.

Additionally, domestic travel would grow steadily, with secondary cities gaining more popularity due to the government’s tourism promotions.

Nevertheless, Thailand’s economic fundamentals still face downward pressures from several factors:

(1) Limited growth in merchandise exports, partly attributed to less correlation between the recovery of Thai exports and global trade volume, with exports of steels, fruits, and HDD expected to shrink this year;

(2) Gradual rebound in the manufacturing sector, which is challenged by external pressures from increased competition with Chinese imports owing to overcapacity in China, and internal pressures from domestic demand slowdown; and

(3) Despite an expedited disbursement of public investment spending after over a six-month delay in the 2024 budget bill, it is unlikely to offset a sharp contraction experienced in the first four months of this year. As for 2025, the Thai economy will continue to rebound with a growth rate of 2.9%, driven in part by private investment rebound and government disbursement returning to normal levels. 

Looking ahead, the Thai economy will face heightened fragility in both the household and business sectors. (1) Households: low-income groups lack sufficient financial buffers, such as precautionary savings and various types of insurance. (2) Businesses: despite signs of overall recovery, some firms remain highly vulnerable—especially small businesses grappling with rising debt amid structural challenges in Thailand’s manufacturing sector. Our assessment indicates that financial measures for these vulnerable groups will still take time to yield broad-based benefits.

SCB EIC expects the MPC to cut its policy rate to 2.25% by the end of 2024, with another cut to 2% expected in early 2025. Impetus from domestic demand will be hindered by household financial vulnerability, ongoing structural issues, tighter financial conditions, and heightened economic risks in 2025. The Thai baht remains highly volatile due to domestic political uncertainties and the Fed’s cautious approach to cutting rates, despite some economic indicators falling below market expectations. In the short term, we expect the Thai baht to gradually strengthen to 35.80-36.80 THB/USD alongside Thailand’s economic recovery, with the year-end baht stabilizing around 35-36 THB/USD. 

Geopolitical tensions will heighten uncertainties and accelerate global economic decoupling. However, this could present an opportunity for Thailand's industry. The global trade landscape has been evolving as many countries rely less on trading partners in the opposite geopolitical blocs and rely more on those adopting with neutral stance. Maintaining geopolitical neutrality, Thailand stands to benefit from trade and investment diversions as global decoupling continues. Nonetheless, the implications to Thai industries can be categorized into two major groups:

(1) Industries poised to benefit from global economic decoupling, such as computer & electronics and automobile & parts;

(2) Industries facing more intense competition from other neutral countries, particularly regional competitors in exports to the US, such as textiles and electrical appliances.

To grab opportunities amid the escalating global economic decoupling, Thailand’s government policies crucially need proactive export promotion alongside business strategies. These policies should also be tailored to manufacturing product groups in line with their specific contexts. Thus, we categorize them into four product groups based on potential gains or losses.

1) Products that Thailand excels in but faces intense competition: Government policies should emphasize enhancing productivity, value creation, and competitiveness. Meanwhile, Thai businesses should focus on promoting product strengths, targeting specific markets, formulating strategies to increase market share, and aligning product development with global trends.

2) Products that Thailand excels in and face low competition: Government policies should encourage exporters to explore new markets for risk diversification and revamp production processes to meet environmental sustainability standards. Thai businesses should adapt by addressing climate risks and investing in renewable energy.  

3) Products that Thailand is inefficient but face low competition: Government policies should offer incentives for exporters to sustain current operations while investing in enhanced production capabilities and focusing on existing markets. Thai businesses should improve production technology and deepen the market understanding of target markets within the US and China blocs to accommodate changes in global demands effectively.

4) Products that Thailand is inefficient and face intense competition: Government policies should incentivize businesses to transition to high-potential sectors in the new global value chains. Meanwhile, Thai businesses should accelerate their integration into the new value chains and seek partnerships with more advanced technology.