On the external side, even though export growth in January is especially robust at 33 per cent, the likelihood of seeing a repeat of spectacular export performance is slimmer this year, as global growth is projected to slow down considerably. In fact, export growth in February has already decelerated to 16 percent. Going forward, the risk factors that can weigh on the ability of the Thai economy to expand will likely come from the US recession and high oil and commodity prices. In an increasingly integrated world, the slowdown in US demand can impact on Thailand’s export prospects. Despite the Fed’s aggressive interest rate cuts and innovative measures to forestall the rise in mortgage interest rates, substantial downside risk remains. Most US watchers agree that the US economy may not be able to avoid a recession; indeed, employment, house price and business confidence data all point to a possibility that it is already in a recession. It’s only a matter of how deep and how long this process will last. But while the US economy weakens substantially with worsening prospects, global price pressure is not letting off. Crude oil prices continue to rise as world oil demand strengthens in the face of limited global production capacity. In this tight demand-supply situation, adverse geopolitical events, unfavorable weather condition or further dollar slide can spike up oil prices. This phenomenon is not new. In fact, continued demand pressure coupled with supply constraint and other uncertainties have led countries to find substitutes to fossil fuel.
So far they have found them in bio-fuels, which in turn put pressure on agriculture commodity prices. Signs of mounting cost-push pressure from oil and commodity prices can be observed in the recent acceleration of domestic headline inflation, which rose above 5 per cent in February. 2  BIS Review 33/2008  Such increase, if continued, can pose risk to the incipient recovery in private consumption as it lowers households’ purchasing power. Rising production and construction costs can also dampen business profit, especially in the face of tight control on final goods prices. Dampened prospects for profits in turn may lead to delays of planned investment. While this downside risk is substantial, there is also an upside. Higher commodity prices strengthen farm income, which tends to benefit a large section of the Thai workforce. Ladies and Gentlemen, The risks to global growth and global inflation have both increased in the near-term. At this point, we cannot be sure how the slowdown of global growth will affect global inflation this year. And even though, from an asset price perspective, there is a positive probability for a correction in oil and commodity prices going forward, we cannot be certain that such correction will be substantial enough to bring the inflation risk down. One thing is more or less certain, however: Global financial interconnectedness almost all but ensures that we should expect higher financial volatility in the near term, as market players alternate between yield-seeking and risk-aversion investment strategies.