Thinking about how lucky we are in Thailand…

Secular stagnation and endless protests –


By Tientip Subhanij.

Once again, it has been a terrible month for Thai politics. Tension is building up everywhere… Against this chaotic background, the country’s economic outlook is being revised down again.

  • Third-quarter gross domestic product growth was lower than expected, at just 2.7%, compared with 2.9% in the second quarter. The National Economic and Social Development Board (NESDB) said
  • the slowdown mainly reflected a sharp contraction in investment, which decreased 6.5%.
  • Domestic consumption, which makes up about half of GDP, also contracted 1.2% due to lower spending on automobiles after the first-car tax rebate scheme expired.
  • For 2013, the NESDB cut its GDP growth forecast to 3%, from a range of 3.8% to 4.3% projected in August…

BildThis lower growth pattern appears to be a worldwide phenomenon. The IMF has continued to revise down its already low global growth forecasts, and it expects well-below-potential growth for advanced industrial countries in the near future.

  • Global growth fell by 0.6% in 2009 before recovering by 5.1% in 2010. But growth then shrank to just 3.9% in 2011 and 3.2% last year and is forecast to be even lower at 2.9% in 2013.

Looking back, we have been mostly positive about the economic outlook. Several years ago, I also thought that the world and especially the US economic recovery would take place much sooner. It did not turn out to be the case, however. Despite unprecedented monetary easing by the Federal Reserve, inflation in the United States is still surprisingly below the 2% target.

  • Companies prefer to hoard cash rather than invest, and the unemployment rate is about two percentage points higher than it was before the crisis.

This month Lawrence Summers, a former US Treasury secretary, came out and explained why this has been the case. He made the point quite forcefully that the very weak recovery increasingly suggests that the US problem is „secular stagnation“, rather than a temporary cyclical phenomenon. In other words, a decade-long secular decline in the „equilibrium real interest rate“ explains both the lack of demand pressures before the crisis and the slow growth afterward.

Definition of “secular stagnation”by Financial Times Lexicon

Secular stagnation is a condition of negligible or no economic growth in a market-based economy. When per capita income stays at relatively high levels,  the percentage of savings is likely to start exceeding the percentage of longer-term investments in, for example, infrastructure and education, that are necessary to sustain future economic growth. The absence of such investments (and consequently of the economic growth) leads to declining levels of per capita income (and consequently of per capita savings). With the reduced percentage savings rate converging with the reduced investment rate, economic growth comes to a standstill – ie, it stagnates. In a free economy, consumers anticipating secular stagnation, might transfer their savings to more attractive-looking foreign countries. This would lead to a devaluation of their domestic currency, which would potentially boost their exports, assuming that the country did have goods or services that could be exported.Persistent low growth, especially in Europe, has been attributed by some to secular stagnation initiated by stronger European economies, such as Germany, in the past few years.  

According to Mr. Summers, the United States is now

  • an economy whose normal condition is one of permanent inadequate demand, due to an excess of desired saving over desired investment, which can only be eliminated at a negative real interest rate.
  • There simply is not enough promising investment opportunity available, at current interest rates. And the economy can get close to full employment only when it is being buoyed by bubbles. Later Paul Krugman, in his commentary on Mr. Summers‘ speech, took this even further. He argued that
  • bubbles and the rise in household debt are good things, as they can at least sustain growth for the US economy rather than letting it fall into deflation as in the case of Japan. If the Fed cannot get the desired rate of savings and investment to reach a natural equilibrium point, then bubbles and more spending of any kind may be necessary for a robust economic recovery.

One implication of this is that central bankers need to stop talking about an exit strategy as any attempts to exit QE too soon will make everyone worse off for a long time. This idea of secular stagnation has attracted a lot of attention at quite the right time as Janet Yellen, known for her dovish stance on monetary policy, prepares to succeed Ben Bernanke as the Fed chairman…

The whole debate about secular stagnation in the US has got me thinking about how lucky we are in Thailand. Regardless of all our problems, Thailand has not run out of both monetary and fiscal weapons. Unlike the US,

  • our monetary policy is not constrained by the zero lower bound.
  • Our public debt is still only 45% of GDP, much lower than that of the US (at 100% of GDP).

At the current juncture, it is becoming apparent that the Thai economy is slowing down much more than anticipated earlier. Companies are reluctant to invest and households lack the confidence to spend. In this situation, monetary policy alone may not be enough, and the government needs to fill the gap and bear the investment risk that the private sector refuses to take on. Let’s hope that the ongoing political unrest will not turn into another destructive cycle and that our public investment plan can take off really soon.

  • We urgently need the long-delayed 2-trillion-baht infrastructure fund to be disbursed quickly or we may have to find other solutions as desperate as engineering bubbles or encouraging more household debt to boost growth. I believe no one, including me, wants to go that far.

Dr. Tientip Subhanij holds a PhD in economics from the University of Cambridge, and currently has a career in banking as well as academia.


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