Thailand flood inflicted deeper economic damage

The disaster's impact is turning out to be worse than expected and rebound hopes now seem dimmer.

The blow on manufacturing led to a 23% qoq sa declline, the largest contraction the sector has seen in two decades, according to RBS.

Other economic drivers like consumer spending and investment nosedived, with little hope for an immediate recovery past the inital technical correction borne from replacing equipment and restaffing the idle factories.

Here's more from RBS:

Not surprisingly, by expenditure the biggest drag on GDP came from net exports, after floods severely damaged a significant number of factories in key manufacturing areas. According to our estimates, the trade balance subtracted a hefty 5.9%-pts from overall GDP growth, as exports plunged by over 15% sequentially. Imports were also down, though not by nearly as much at -9.7%qoq sa. Echoing export developments, manufacturing activity (as measured in GDP by output) dived nearly 23%qoq sa, the biggest collapse based on records going back to 1993.

Naturally the floods also took a toll on private consumer spending and investment, with many workers being temporarily out of work and capital outlays having to be put on hold. Consumption fell 4%qoq sa while investment slid by nearly twice that, though they subtracted nearly the same amounts from overall growth, at -2%-pts and -1.7%-pts respectively. Even government consumption was affected – the component slipped 4.8%qoq sa as purchases from enterprises tanked.

Such a sharp economic deterioration continues to leave us doubtful of the economy's ability to rebound as quickly as some market participants had hoped. Admittedly, there is a significant 'shock' element behind the decline in Q4 GDP. Prior to that, however, cyclical weakness was also already evident – export momentum has been slowing since 2Q11, as have investments. In fact the contraction in investment in 4Q marks the second straight quarter of decline. Then there is consumption, which for the better part of 2011 was already drifting sideways (in level terms) prior to the floods.

Going forward there will no doubt be a 'technical' recovery, say in 1Q and even 2Q – plant and equipment will get replaced again, and workers will have to be re-employed to operate them. Beyond that, however, the broader – and moderating - economic cycle will dominate, particularly in the absence of strong fiscal efforts to boost the economy.

Parliament has approved a THB 50bn widening of the budget deficit for FY12 (year ending Sep12) to THB 400bn, but in absolute terms as well as a percentage of GDP, this is still a smaller net outlay than compared to FY11 (-3.6%of GDP, vs -3.9% for FY11). Other off-budget measures, including a proposal to allow BOT to issue THB 300bn in soft loans to commercial banks, a THB 350bn of flood recovery/water management programs and the establishment of a THB 50bn disaster insurance fund to help firms secure flood insurance, are in our view either still too politically tangled and/or too long-term to make an immediate difference to the current economic environment.

The BOT noted at its January policy meeting that "the impact of the floods on the Thai economy was greater than previously assessed and the restoration process is likely to be more drawn out." That disappointment is now probably even greater – following the GDP release today, Assistant Governor Paiboon said that the numbers were worse than the central bank had expected, and that the central bank will wait for more economic data before reviewing its forecast.

The data so far is not great – there is a rebound underway, but we remain well off pre-flood levels in terms of activity and confidence. In December the central bank's private consumption index bounced 1.7%mom sa, after sliding a cumulative 5.6% from Aug11; meanwhile consumer confidence increased for a second month in January, albeit at a slower pace and still at a two-year low. More worryingly, as of December there was still no recovery seen in the BOT's private investment index.

Against this backdrop we think the government's 7% growth forecast for 2012 looks highly ambitious, and we remain comfortable maintaining our projection of 2.9% for now. We also continue to have one more 25bp rate cut pencilled in for the March 21 policy meeting, which will take the policy rate to 2.75%. For the past few weeks the return of global risk appetite and firming of data around the region has seen investors price out further rate cuts in Thailand; following today's poor GDP release, expectations for further easing may well start to build again.