Govt spending to fuel consumption, inflation

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ADB FORECAST

Govt spending to fuel consumption, inflation
By Wichit Chaitrong
The Nation 2011-09-15

Fiscal sustainability of populist schemes not yet a concern, but growth outlook less rosy.

New government spending will boost not only consumption, which is good for the economy, but also inflationary pressure, the Asian Development Bank said yesterday.

The economy will expand by 4 per cent this year, not 4.5 per cent as forecast in April, Luxmon Attapich, senior country economist of the ADB, told a news conference.

The widespread flooding will reduce farm output, while the weak recoveries in developed economies and high inflation will act as a drag on the Thai economy, she said.

The ADB also lowered its forecast for growth in Thailand's gross domestic product next year to 4.5 per cent from 4.8 per cent.

"We've taken into account the first-time-car-buyer and other fiscal expansionary measures," she said, referring to the government's plan to offer tax rebates of up to Bt100,000 for first-car purchases.

Inflation is also expected to be higher than predicted earlier - 3.8 per cent this year instead of 3.5 per cent, and 3.2 per cent next year instead of 3 per cent.

Regarding government spending on schemes such as price pledges for rice, a minimum wage of Bt300 per day for workers and minimum salaries of Bt15,000 for new university graduates, Craig Steffensen, ADB country director, said he understood that the government was trying to manage the economy along an inclusive growth path - focusing on the poor.

The government has backtracked on some election promises, as it has to follow fiscal discipline.

Whether government spending will lead to a fiscal crisis later on is not a foreseeable concern.

"I don't worry about fiscal sustainability as this stage, but I don't know what will happen in five or 10 years," he said.

Household consumption and private investment will continue to expand because of increasing confidence from the improvement in political stability, the ADB said.

Investment will increase in key industries - electronics, petrochemicals and automobiles - which now operate close to full capacity, Steffensen said.

GDP in developing Asia will grow 7.5 per cent this year and next year, slightly down from 7.8 per cent in 2011 and 7.7 per cent in 2012 as previously forecast by the ADB.

Developing Asia continued its steady growth in the first half of this year. The sluggish recovery in the major industrial economies will moderate the region's growth in the second half of the year and beyond, the ADB said.

China's economy is expected to expand 9.3 per cent this year and 9.1 per cent next year, slowing from 10.3 per cent last year.

Luxmon also urged Thailand and other countries to prepare for the growing old-age population by creating adequate pension-fund schemes.