ความเชื่อมั่นและผลต่อการกระตุ้นเศรษฐกิจ

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Government has been forcefully driving Thai economy last year, notably through public investment. In fact, government invested 30% more in 2015 compared to 2014! Well, you may curiously ask if it is big or small. Let say the average growth rate for public investment in 2010-2014 was -1.8%.

On top of direct public investment, government has issued several of incentives to lure in private investment and stimulating private consumption, such as lower corporate income tax, providing soft loans, promoting targeted clusters, and 15-thousand-baht shopping stimulus program.

Unfortunately, in 2015, private investment shrank 2%, while private consumption stagnated with merely 2% growth rate. In other words, despite all supports from the government, private demand remained subdued.

Could we rely on Public Investment Alone?

If we are to summarize current situation for Thai domestic economy in 2015 as well as today in one sentence, it would be ‘robust expansion from government, but fragile private demand.’ So, the question is could we sit and chill expecting the economy to recover simply from public investment?

Definitely no!

The reason is that public investment accounts only 6% of total GDP. Therefore, 30% growth rate in public investment would contribute only 1.8% to overall growth. In contrast, private consumption and investment is 51% and 19% of total GDP, respectively. Hence, they need to expand only 2.6% in order to achieve the same level of contribution!

In other words, private demand is much more broad-based and much bigger than public investment – 70% versus 6%. The key point is that Thai economy couldn’t solely rely on public sector. We inevitably need robust recovery in private sector too.

We Need Continuous Improvement in Sentiment

Alas, private consumption and investment situations aren’t spectacularly good currently. According to monthly economic indices, consumption has been mildly improved. However, the latest data suggested a sharp deceleration after temporary measures expired. Similarly, investment gradually recovers, but remains at a low level. In other words, domestic demand is currently in a fragile state. This is quite worrisome for Thai economy. As mentioned earlier, without better outlook for private demand, Thai economy is unlikely to recover robustly.

Hence, the one-trillion-baht question is how we could stimulate consumption and investment? Obviously, the answers include many factors, e.g. boosting income or new government’s policies. However, one primary factor, which cannot be neglected, is sentiment.

According to a lot of researches, both ours and others, better sentiment leads to better domestic demand. More specifically, private consumption and investment are associated with consumer and business sentiments, respectively.

But would improving sentiment instantaneously improve consumption and investment? Let paraphrase. Will you buy a new car immediately after your sentiment improve? Or should firm start constructing new factory instantly after executives feel better with their business?

Well, we don’t think so. We hypothesized that sentiment must improve continuously for a certain period of time before it has material impact on real economic activities. Henceforth, we did the research to determine exactly how many months the sentiment must improve before consumption or investment is positively stimulated.

According to our analysis, we could confirm that the longer consumer confidence is in an increasing trend, the more positive effect is transferred to durable goods consumption.

Noted that consumption could be broadly divided into 2 groups – non-durable and durable. Non-durable goods are mostly goods you consume in daily life, e.g. food and shampoo. You need to use them regardless of economic situation.

On a contrary, durable good, by definition, is good that last more than 3 years. Refrigerator, sofa, car, or house, for example. This type of goods is usually bigger and more expensive. One needs good sentiment to buy such goods.  So, this is where our research focused. As a result, our analysis reveals that consumers spend the most on durable goods after consumer confidence has been increasing uninterruptedly for 4 months.  

What would happen after the fourth month, say the fifth month? Sorry to say, but the positive effect starts to gradually fade away. In fact, this is somewhat intuitive. After all, you are not going to buy new television every month, aren’t you?

For investment, the result is largely identical to consumption. The longer the business sentiment uninterruptedly increases, the higher private investment is observed. The difference is that the positive impact reaches the maximum after 3 month, instead of 4.

So, our results emphasize that confidence must be continuously supported, at least a quarter, before we would observe a significant boost on private demand – both consumption and investment. The implication of our analysis is clear. If the government wants to effectively boost private consumption and investment, it must continuously enhance private confidence!

Current Sentiments and their Outlooks are not Supportive

We have shown the significance of sentiments on private demand. Now, let’s take a look at current sentiment.

Consumer confidence slightly increased during the last quarter of 2015. Nevertheless, it mostly stays flat thereafter. In opposite, business sentiment has been oscillating without any discernible trend. That is current private activities, both consumption and investment, are not well supported by the sentiment.

What about in the subsequent periods? Well, we rather foresee a couple of downside risks to the sentiments. Arguably, the most important factor buttressing confidence right now is probably government’s infrastructure investment projects. However, it seems like some projects might be delayed. This could dampen the sentiment, particularly for business. On top of that, the adverse impact from drought on agricultural-related households will definitely hurt consumer confidence. Not to mention Chinese economic slowdown and other risks from global economy. Thus, the outlook for sentiments, as well as private demand, doesn’t look very bright.

All in all, if the government wants to drive Thai economy in 2016, it is essential that the government has to find a proper method to continuously support domestic confidence. Maintaining positive confidence throughout 2016, hands down, will be a crucial part for stimulating domestic demand and Thai economy as a whole. In our opinion, the government should pay particular attention to the execution of infrastructure projects. If the construction could proceed as plan, people would feel more confident with the plan. After all, execution is as important as the design.

(Published in Bangkok Post on March 4, 2015)

TMB Analytics is the economic analysis unit of TMB Bank. Behind the Numbers is co-authored by Naris Sathapholdeja and Peerawat Samranchit. They can be reached at tmbanalytics@tmbbank.com

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