Bandid Nijathaworn: Thailand’s economic outlook – an update Speech by Mr Bandid Nijathaworn, Member of the Board of the Bank of Thailand, at the Australian-Thai Chamber of Commerce dinner talk, Bangkok, 14 July 2010. *  *  *  First, let me thank the Australian-Thai Chamber of Commerce for the invitation. This year has been a particularly challenging year for Thailand, on account of both developments in the global economy and the political situations at home. So, what I want to do today is to give you an update on Thailand’s economic outlook, particularly to see what these challenges have meant for the Thai economy, as well as for the outlook going forward. A keyword this year is “uncertainty”. As you well know, the market does not like uncertainty because it raises risk and costs. For the global economy, this year has been an exceptionally “complicated” year because of the two major uncertainties that have contributed to an unusual degree of volatility in global financial markets. The first is uncertainty surrounding the strength of global economic recovery which has been weighed down by the high levels of unemployment and slow bank-lending growth in the advanced economies, as well as prospect for higher long-term interest rates in the major economies linked to the financing of public sector deficits. This is the first uncertainty. The second uncertainty is policy.
Another consequence of the new economy - perhaps the least controversial - is the direct effect on inflation from the steep price fall for IT-related products, which are not a negligible item in the CPI basket. The falling prices are explained in turn by the very strong productivity growth and high rate of innovations in this product area. The result may be what is commonly known as a positive price shock, which in many respects resembles the effects of a marked price fall for some other specific CPI component. So far I have discussed the monetary policy implications solely in terms of a notional new economy’s consequences for supply. New techniques and strong productivity growth leave their mark on profit  3  BIS Review 18/2000  expectations and capital formation, for example, and thereby add to the forces that are raising potential growth. With rising share prices, however, increased household wealth adds to demand. This raises questions to do with dynamic aspects. One risk is that demand grows faster than supply despite an improvement in potential output. That could lead to stronger price pressure and accordingly motivate a tighter monetary stance in the traditional way. Another risk is that investment activity becomes unduly optimistic and leads to financial imbalances. This problem is more difficult to handle in monetary policy’s normal analytical framework, where undesirable changes in price pressure are parried with the interest rate.