ECONOMICS COMMENTARY — Sep 16, 2021
Thailand: COVID-19 Delta Wave Disrupts Economic Recovery
By Rajiv Biswas
Thailand had considerable success in containing its domestic COVID-19 pandemic during 2020 and the first quarter of 2021. However, the situation has deteriorated since April 2021, with an escalating COVID-19 wave driven by the more highly transmissible Delta variant that has resulted in a rising death toll. The international tourism sector, which was a major growth driver prior to pandemic, has been in a protracted and deep slump since April 2020, with hopes for any significant near-term tourism sector recovery fading.
Thailand's economy hit by COVID-19 Delta wave
The Thai economy was in severe recession in 2020, with a GDP contraction of 6.2% year on year (y/y). This reflected the impact of the COVID-19 pandemic on domestic economic activity as domestic lockdown measures were put in place, as well as the impact of global lockdowns on international merchandise trade. A particular severe negative shock for the Thai economy has been from the effects of global travel bans on international tourism travel.
Some recovery in economic momentum was evident during the first half of 2021 (H1 2021), with GDP growth of 2.0% y/y. Base year effects contributed to the rapid growth rate of 7.5% y/y recorded in Q2 2021, although compared to Q1 2021, quarter-on-quarter growth was a modest 0.4%.
Private consumption rose by 4.6% y/y in Q2 2021, and by 2.1% y/y in H1 2021. Private investment rose by 9.2% y/y in Q2 2021 and by 5.9% y/y in H1 2021.
Exports of goods performed strongly in Q2 2021, rising by 30.7% y/y, with H1 2021 exports of goods up by 15.7% y/y. In July, merchandise exports were up 20.3% y/y. However, services exports have been experiencing deep and protracted recessionary conditions due to the collapse in international tourism. In 2020, exports of services contracted by 60% y/y, with a further 47% y/y decline recorded in H1 2021.
Manufacturing output rose strongly in Q2 2021, up by 16.8% y/y, with expansion of 8.2% y/y in H1 2021.
However, despite the improving momentum of GDP growth in Q2 2021, the onset of a severe new COVID-19 Delta wave since late June 2021 has darkened the near-term economic outlook. This resulted in the Thai government introducing stricter lockdown measures in Bangkok and nine provinces from 12th July, with further extensions of these restrictions during August.
Low COVID-19 vaccination rates have contributed to Thailand's vulnerability to the latest pandemic wave. However, the Thai government has ramped up its vaccination program in recent weeks, with an estimated 39% of the total population having received their first dose vaccinations by mid-September. Although there has been some decline in daily new COVID-19 cases reported in Thailand during the first half of September, the level of daily new cases still remained high by mid-September 2021.
Although some easing of restrictions on the retail sector have been introduced since 1st September, the overall impact of the recent pandemic wave and the subsequent restrictive measures is expected to be a significant drag on GDP growth momentum in Q3 2021.
Thailand's manufacturing sector shrank for a fourth straight month and at a faster rate in August, according to the latest IHS Markit PMI data. The IHS Markit Thailand Manufacturing PMI eased to 48.3 in August from 48.7 in July, remaining below the 50.0 no-change mark for the fourth straight month to signal a deterioration in the health of the Thai manufacturing sector.
New orders and production both fell for a fourth consecutive month and at a faster pace compared to July. Companies mostly cited the escalating COVID-19 pandemic driving the deterioration of economic conditions.
Overall sentiment remained weak as manufacturers grew more pessimistic on the 12-month outlook for production in August, particularly given the COVID-19 related disruptions. The impact of supply chain disruptions due to the COVID-19 wave was reflected in the decision by Toyota Motor to temporarily close three of its factories in Thailand during July.
Thailand's tourism sector remains in deep slump
By 2019, direct tourism spending accounted for an estimated 12% of Thai GDP, with Chinese tourism having played an increasingly important role in underpinning the Thai tourism economy. Thailand has been one of the most notable beneficiaries of the boom in Chinese tourism over the past decade, with total annual Chinese tourist visits to Thailand having risen from 2.7 million in 2012 to 11 million in 2019. Chinese tourism spending in Thailand was estimated to have reached USD 18 billion in 2019, amounting to more than 25% of total international tourism spending in Thailand.
In 2019, Thailand had 39.8 million foreign tourist arrivals. Although international tourism continued to be permitted during the first quarter of 2020, tourism visitors were banned from April 2020 onwards. Consequently, total international tourism visits for calendar year 2020 fell to 6.7 million arrivals, almost entirely comprising tourism arrivals during the first quarter of 2020.
The international tourism sector has remained in dire straits during 2021 to date. In the first half of 2021, total international tourism visitor numbers were just 40,500 compared with 6.7 million visits in the first half of 2020, when international tourism had already shut down during the second quarter of 2020.
Due to the escalating domestic pandemic, domestic Thai tourism was also hit during the first half of 2021, with total domestic tourism trips down 15% y/y while domestic tourism revenue fell by 38.5% y/y.
Although a pilot scheme for vaccinated international tourists was introduced for Phuket from 1st July 2021, tourist arrivals have been low. This likely reflects a number of factors, including the escalating COVID-19 wave in Thailand during July and August, as well as considerations such as quarantine requirements in home countries for travellers returning from Thailand.
With the whole of Southeast Asia still suffering from a severe escalation in COVID-19 cases, prospects for any near-term recovery in international tourism in Thailand remain low, at least for the remainder of 2021.
Economic outlook
The Thai economy continues to face severe economic challenges in H2 2021 despite the rebound of manufacturing output and strong exports of goods. Continuing economic shockwaves to the economy have come from the collapse of international tourism, given the key role it plays as an important pillar of the Thai economy. Furthermore, the latest COVID-19 Delta wave has further dampened economic growth momentum due to weakening domestic demand. These factors are expected to significantly restrict the pace of GDP growth in 2021, to just 0.8% y/y.
At present, the most likely pathway out of the protracted collapse in Thailand's international tourism sector and its wider repercussions to other sectors such as retailing and transportation will be the continuing rollout COVID-19 vaccine programs in Thailand as well as key tourism markets. Meanwhile the economic costs to Thailand's tourism industry and tourism sector jobs will remain severe, acting as a major drag on the economy.
The rapid ramp-up of Thailand's COVID-19 vaccination program during H2 2021 is expected to help to contain the severity of the pandemic, allowing domestic economic activity to improve during the next six months. Furthermore, a gradual reopening of international tourism in Thailand over the next 12 months is expected to be an important factor supporting economic recovery, with GDP growth projected to strengthen to around 4% in calendar year 2022.
Rajiv Biswas, Asia Pacific Chief Economist, IHS Markit
Rajiv.biswas@ihsmarkit.com
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Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.
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