Thailand: Steepest price fall since the financial crisis reflects huge drop in demand

Thailand’s consumer price index (CPI) fell more than expected, by 3% year-on-year in April, much weaker than our -2% forecast and the -1.2% consensus median. This is the steepest CPI fall since the global financial crisis more than a decade ago. The negative inflation streak started in March with a 0.5% YoY fall. We believe it has further to run through the end of this year.

Core inflation remained in positive territory in April, although it dipped modestly to 0.4% from 0.5% in March, suggesting that a sharp slowdown in headline inflation largely came from food and fuel prices. Inflation in the food component slowed to 1% from 1.6%, led by a more than 4% plunge in fruit and vegetable prices. The housing component, where utility prices are also included, swung to -4.6% from +0.1%. And, transport worsened to -9.8% from -4.9%.

A sharp fall in inflation reflects significant demand destruction due to the Covid-19 pandemic. The disease has been under control and businesses are gradually reopening this week. Even though this should lessen the downside price pressure somewhat, we believe we are in for a long stretch of deflation ahead.

We now see a 3-4% CPI fall in the rest of the year, leading to a sharp downgrade to our annual inflation outlook for 2020 to -2.3% from -0.8%.

Also released today, Thailand’s Markit manufacturing PMI plunged to 36.8 in April from 46.7 in March. This was the worst reading since the series began in 2016, led by a record decline in output, new orders, and employment components. The downward pressure on input prices continued to intensify, supporting our view of a sustained negative trend in consumer prices for the rest of the year. The business sentiment PMI component projecting 12 months ahead also pointed to continued deterioration.

All this points to a deepening manufacturing contraction and through that, GDP contraction in the current quarter. Released on 18 May, we estimate as much as a 5.1% YoY GDP fall in the first quarter of 2020. Our forecast for 2Q GDP growth is -8.3%.