Without bold actions, economic as well as political ones, the potential for Europe to be swept into a downward spiral of collapsing confidence and stagnant growth looms large. This grim possibility will remain a drag on the global economic backdrop and hence a key risk factor for the Thai economy in the foreseeable future. BIS central bankers’ speeches  1  While the potential impact on Thailand through financial channel appears limited due to low direct exposure of the Thai financial institutions to the European financial system, the impact through trade could be significant. This reflects Thailand’s strong trade tie with Europe, which accounts for around 10 percent of our total exports. Fortunately, any such slowdown in Thai exports can be cushioned to some degree. A key reason is Thailand’s shift towards more intra-regional trade within Asia, as well as our success in diversifying into alternative export markets more generally. Against this backdrop of continuing headwinds from abroad, I believe that Thailand is poised for a sustained upward growth trend. Despite the floods, our long-term growth trajectory remains intact. We project that economic growth will rebound to 5.7 percent in 2012 driven mainly by strong domestic demand. Fiscal spending through flood-relief and stimulus measures will play a supportive role. The latest economic data show private consumption already recovering swiftly. Business confidence has also rebounded strongly and investment is projected to regain a firm footing by the third quarter of this year.
For purposes of comparison, the (dash-dotted) green curve shows the conditional inflation forecast published in March, which was also based on the assumption of a three-month Libor of 0.25%. Until the beginning of 2012, the path of the SNB’s new conditional inflation forecast lies above that of the previous quarter’s forecast. This is attributable to the assumption of higher oil prices compared to the previous quarter and somewhat higher import prices. The significant increase in the third quarter of 2011 is due to a base effect, because inflation in the corresponding quarter of 2010 was comparatively low. In addition, a one-off statistical effect can be expected in the third quarter of 2011. This is attributable to more frequent data collection in the case of prices for clothing and shoes; it also accounted for an increase in inflation in the first quarter. During the course of 2012, the path of the new forecast falls below that of March, due to the slowdown in inflation attributable to the latest appreciation in the Swiss franc. Towards the end of the forecast period, inflation rises briskly and exceeds the upper bound of 2%. This shows that the current expansionary monetary policy cannot be maintained over the entire forecast horizon without compromising price stability in the long term. Due to the risks mentioned previously, the conditional inflation forecast is, however, associated with a high level of uncertainty.