2025: An economy facing external challenges and growing internal difficulties

SCB EIC has revised its 2025 global economic growth forecast from 2.8% to 2.5%, citing the anticipated impacts of Trump 2.0 policies. These policies are expected to exacerbate geopolitical tensions and intensify trade protectionism, adversely affecting the global economy primarily through trade, investment, and labour markets. At the same time, several major economies have prepared some measures to mitigate the negative impacts of Trump 2.0. However, political conflicts in some countries, including Germany, France, and South Korea, could pose significant risks for efficient policy responses. The US economy will experience moderate net negative impacts from the Trump 2.0 policies. This is because certain policies, such as income tax cuts and deregulation, would help stimulate domestic investment.

Uncertain and Diverging Monetary Policy Directions

The global monetary easing is becoming more divergent and uncertain. SCB EIC expects the US Federal Reserve (Fed) to adopt a more cautious approach to ease policy rates due to heightened inflation risks stemming from Trump 2.0 policies, particularly tariff hikes and incentives for domestic investment.

Despite this new factor, global inflation may not rise significantly. This is partly attributed to a slowing global economy and declining energy prices, driven by weaker global demand and increased oil supply from the US supported by Trump. These conditions are likely to lead the European Central Bank (ECB) and The People's Bank of China (PBOC) to implement further rate cuts to address structural challenges and additional pressures from Trump 2.0 policies. Meanwhile, Japan may take a different path, potentially normalizing rates faster than anticipated to counter excessive yen depreciation triggered by Trump 2.0.

Thai Economy Will Expand Notably in Q4 but Will Face Pressures from Trump 2.0 Since H2/2025

The Thai economy in Q4 is expected to grow by 4%, driven by continued momentum from exports, government spending, and the tourism sector. SCB EIC projects the Thai economy to expand by 2.7% in 2024. However, the economy is likely to feel the impact of Trump 2.0’s trade protectionist measures since H2/2025.

Thailand is more likely to face a significant risk of being subjected to US import tariffs, as more than 70% of total exports to the US fall into product categories targeted by the US for reducing trade deficits and promoting local supply chains. These categories include electronics, automobiles and parts, machinery, and computers.

Moreover, China’s overcapacity issues will put additional pressure on the competitiveness of Thai products both domestically and internationally, leading to an export slowdown. This will further exacerbate the challenges facing Thailand’s manufacturing sector, which has yet to recover, even with the anticipated additional fiscal stimulus next year.

Private Investment Set to Recover Modestly in 2025 Amid Industrial Challenges

Private investment is projected to recover in 2024, though the rebound is expected to remain modest due to ongoing challenges in the industrial sector, including competition from Chinese imports and weak domestic demand. Additionally, according to the SCB EIC Consumer Survey 2024, it reveals that over 60% of consumers expect Thailand's economic outlook to get worse next year, with low-income groups showing the highest levels of pessimism.

This reflects fragile consumer confidence, with many likely to cut back on spending amid economic and income uncertainties. The survey also points to declining demand for new housing and vehicles in the coming year, driven by factors such as difficulties in accessing credit, high prices, limited income, and debt repayment obligations.

SCB EIC Projects Deterioration in Overall Retail Loan Quality Amid Tightened Lending Standards

SCB EIC anticipates that the overall quality of retail loans is likely to deteriorate further, amid continued strict lending standards by financial institutions. Data from the National Credit Bureau (NCB) indicates a persistent decline in retail loan quality, suggesting that household debt issues will take time to resolve. This is expected to weigh on consumption in the near term.

The latest household debt resolution measures aim to provide greater support to vulnerable retail borrowers who still have the potential to repay their debts. However, the success of these measures will largely depend on the recovery of borrowers' incomes.

SCB EIC Expects a 0.25% Policy Rate Cut by MPC in February 2025 and Remain at 2% Throughout the Year

SCB EIC forecasts that the Monetary Policy Committee (MPC) will lower the policy rate by 0.25% in February 2025 to 2% and maintain this level for the rest of the year. Although there is no immediate pressure to prompt a rate cut, increasing downside risks to the Thai economy from both internal vulnerabilities and external challenges are anticipated. Additionally, a further rate reduction would help ease debt burdens and mitigate 
the impact of tighter financial conditions on overall economic activity.

Baht to Weaken Slightly in the Short Term but Strengthen in H2/2025

The Thai baht is expected to depreciate slightly, remaining within a range of 34.00–35.00 baht/USD for the rest of this year. However, close attention must be paid to fluctuations in other currencies that could impact 
the baht.

In 2025, capital outflows are likely to continue, exerting downward pressure on the baht in the first half of the year. However, the baht may strengthen in H2/2025, supported by several factors, including the Federal Reserve’s rate cuts, declining global oil prices, rising gold prices, and returning capital inflows. By the end of 2025, the baht is projected to range between 33.50–34.50 baht.USD.

Thai businesses still face significant risks, driven by global economic volatility, Trump 2.0 policies, intense competition from abroad, pressures from megatrends, and structural challenges within Thailand's manufacturing sector. The extent of the impact, however, will depend on each business’s ability to adapt. For instance, the automotive industry is affected by global economic volatility and household vulnerabilities, compounded by the pressure from the transition to EVs, which limit businesses’ ability to adapt. In comparison, although the residential real estate sector is affected by slowing purchasing power, some businesses have successfully pivoted to target high-potential customer segments.

These external challenges and internal weaknesses reflect Thailand's slowing economic growth in the short-term and long-term structural issues. Additionally, Thailand's economic development direction in recent years has provided few opportunities for upward mobility within the social structure. These constraints have led to a Thai economy that exists in 'Two worlds,' differing across the following three dimensions:

1.    Dimension: Weak vs. Strong. The two worlds of households with weak financial positions versus those with strong financial positions highlight the severe wealth inequality among Thai households. Households with weak financial positions often face income shortfalls relative to expenses and have irregular earnings. When such households encounter income shocks, their world is more significantly affected, and their recovery is slower compared to households with strong financial positions.

2.    Dimension: Old vs. New. The two worlds of the old manufacturing sector versus the new manufacturing sector. The old manufacturing world is not evolving alongside changes in the economic, social, and technological landscape or will face various risks. In contrast, the new manufacturing world has opportunities to grow with the changing landscape and is less impacted by risks.

3.    Dimension: Large vs. Small The two worlds of large businesses versus small businesses reveal stark differences in resilience and growth. Small businesses experience significantly more profit volatility than large businesses. During the Covid-19 crisis, the revenue of large businesses did not decline and even grew by nearly 10% after the crisis ended. Conversely, the revenue of small businesses contracted by approximately 2-3% during Covid-19 and has not yet recovered.

The future direction for Thailand’s economic development should focus on bridging the gap between these two worlds through three goals for quality economic growth as follows:

1.    Thai people should have buffers against adverse events, which would provide a solid ground for those in the lower-income world to seize growth opportunities. This is done through building resilience for low-income individuals. Policymakers should play a critical role in this process by designing supportive mechanisms, such as targeted social assistance and social security programs, alongside financial regulations that foster the development of insurance markets for low-income individuals and small businesses.

2.    Thai people should grow by developing and adapting themselves to the changing economic, social, and technological landscape. In support of the process, policymakers should act as facilitators by securing business opportunities for domestic businesses through trade and investment negotiations.

3.    Thai people should have the opportunity to generate economic value and grow inclusively. Policymakers have roles as designers of frameworks for economic resource allocation and fair competition to ensure that individuals from the lower-income world have access to resources, enabling them to compete effectively and grow inclusively.