The weakest area of the economy at the moment is probably private investment which has been continuously decelerating for a few months now. But the surging inflation has also put private consumption increasingly at risk. Indeed, the latest issue of Asia Pacific Consensus Forecasts shows Thailand’s GDP growth falling over the next three quarters before recovering in the second quarter of 2009. Against this backdrop, the policy priority is to head off the rising inflationary pressure while keeping a close eye on downside risks to growth. This is normally already very difficult in the presence of cost-push shocks that create a short-run trade-off between inflation and output stabilization. What further complicates the current situation is that a prolonged period of oil shocks and inflation tends to divest funds from, as well as discourage, fixed capital investment and hence deteriorates what economists refer to as the economy’s potential output. This issue is especially important when the economy is energy inefficient. Let me elaborate further. Conceptually, potential output is the level of output which can be sustained over an extended period without exerting upward or downward pressure on inflation. When the actual level of output is above potential output, inflation tends to rise. Conversely, when the actual level of output is below potential output, inflation tends to fall.
Unemployment rose to very high levels. The stringent containment measures led to a sharp decline in private consumption. There was also a shift away from services and towards goods consumption. Travel plans had to be put on hold, and much of the cultural sector was shut down. The pandemic and the measures to contain it also dampened the willingness and ability of mainland firms to invest. Petroleum investment fell on the back of lower oil prices and greater uncertainty. Reduced travel resulted in a fall in both exports and imports. After the decline in March and April, economic activity picked up towards summer, and the recovery continued through Q3. Unemployment declined. Through autumn, infection rates increased in Norway, and new containment measures were introduced. Activity slowed in the first months of this year, and in March and April we saw a renewed rise in the number of furloughed workers. Recently, infection rates have fallen. A gradual reopening of society is underway, and a large portion of the adult population in Norway will likely be vaccinated by the end of summer. This suggests that economic activity will pick up through 2021. Following a rise over the past three years, wage growth slowed again slightly in 2020. The moderation in wage growth must be viewed in the light of a sharp rise in unemployment caused by the Covid-19 outbreak and a marked decline in business sector profitability. Inflation has varied quite markedly over the past year.