Is the bubble knocking? How should Thailand's economy respond to this storm?

Why Should We Pay Attention to Stagflation Risks Now

What happens when economic growth stalls while prices continue to rise? This is stagflation—an economic curse that troubles all countries. For a developing country like Thailand, this risk is not a distant hypothetical but a real threat that needs serious assessment.

The danger of stagflation lies in its breaking of conventional economic logic. Usually, during a recession, declining consumer demand automatically lowers prices. But in a stagflation environment, high unemployment and slow growth coexist with rising prices. This hits low-income groups the hardest—already having thin incomes, they see their purchasing power eroded further, leading to a sharp decline in living standards.

The Essence of Stagflation: Two Bad Economic News Combined

Stagflation results from the combination of two words: Stagnation and Inflation.

Strictly defined, stagflation refers to a situation where economic growth stalls or even contracts while the price index rises. Theoretically, this seems impossible—who would raise prices during a recession?

The answer lies in cost-push inflation. This type of inflation is not driven by excessive demand but by rising production costs—such as soaring oil prices, shortages of raw materials, or supply chain disruptions. Facing cost pressures, companies either shut down or raise prices to pass on costs to consumers. The result is increased unemployment and higher prices simultaneously.

Historical Lessons: The 1970s US Case Study

The first large-scale outbreak of modern stagflation occurred in the 1970s in the United States. The crisis was triggered by the Middle East oil embargo—Arab countries, protesting Western support for Israel, suddenly announced an oil embargo.

What was the result? US inflation soared above 10%, and unemployment approached 10%. These two figures appeared together, defying all economic expectations at the time. Worse, the problem persisted for several years without resolution.

Between 1977 and 1980, the Federal Reserve changed three chairmen in an attempt to control the situation. The final chairman, Paul Volcker, made a radical decision: raising the benchmark interest rate to 18%. This was a harsh medicine—it indeed suppressed inflation but at the cost of the most severe post-war recession in US history.

The entire early 1980s saw the US economy trapped in a cycle of “recession-recovery-recession.” The impact of this crisis extended far beyond the US—several Latin American countries fell into debt crises, and the entire region nearly collapsed.

This history teaches us: once caught in stagflation, solutions are either extremely painful or take a very long time.

Where Is Thailand Now?

Let’s examine Thailand’s economic situation using three indicators:

Growth prospects still supported

The Bank of Thailand forecasts a GDP growth of 3.7% in 2023. This growth rate may seem modest, but it is supported by:

Tourism recovery as the core driver. It is expected that in 2023, foreign tourists will reach 22 million (not including the full reopening contribution from China). This figure is vital for Thailand’s economy—benefiting tourism, dining, hotels, and retail sectors.

Steady domestic consumption. As employment improves and incomes increase, household and business spending are rising. This creates a virtuous cycle.

Unemployment rate improving

Thailand’s unemployment data is encouraging. Currently, about 490,000 people are unemployed, with an unemployment rate of only 1.23%. Long-term unemployed have decreased from 180,000 to 100,000. This indicates a healthy labor market recovery.

Full employment means: more people earning income → increased consumption → higher sales for businesses → more job opportunities. This is completely opposite to stagflation characteristics.

Inflation cooling but still cautious

In February 2023, Thailand’s Consumer Price Index (CPI) rose 3.79% year-on-year—a downward trend. Compared to 5.02% in January, inflation is clearly moderating.

Factors driving inflation down include:

• Decline in international oil prices
• Government adjustments to fuel prices
• Seasonal decline in agricultural product prices

However, concerns remain. The Bank of Thailand admits that as long as businesses continue to face high costs, inflation could stay elevated longer.

Will Thailand Really Fall Into Stagflation? The Current Answer Is No

Analysts generally agree: The risk of stagflation in Thailand is currently low. Why?

Growth and inflation are not synchronized. In a healthy economy, when growth accelerates, inflation rises; when growth slows, inflation falls. Thailand is experiencing moderate but stable growth, with inflation from high levels but in decline—this is not stagflation.

The labor market is strong. Low and improving unemployment indicates the economy is still absorbing labor. This contrasts with the high unemployment characteristic of stagflation.

Demand is recovering. Data from tourism, consumption, and services all point to increasing demand, not stagnation.

But Long-Term Risks Cannot Be Ignored

Although current risks are manageable, Thailand faces several long-term challenges:

Global economic uncertainty. Risks from US and European banking sectors, recession expectations, could spill over into Thailand. Export pressures may increase.

Structural cost increases. Long-term upward trends in electricity, transportation, and labor costs have not reversed. This will naturally push up business costs.

Demographic changes. Accelerating aging population will increase social security costs, which could push inflation higher.

Debt constraints. Household debt levels are high. If the central bank is forced to raise interest rates to combat inflation, borrowing costs will rise, impacting consumption and investment.

What To Do If Stagflation Truly Arrives

For policymakers

Increase domestic supply. Most stagflation stems from supply constraints. The government should enhance local production capacity, increase the supply of goods and services, and maintain employment while lowering prices.

Coordinate monetary and fiscal policies. Relying solely on interest rate hikes can burden the economy; fiscal policies should support impacted businesses and individuals to prevent worsening unemployment.

Monitor and act proactively. Don’t wait until stagflation fully develops. When cost pressures begin to emerge, action should be taken.

For investors

Allocate inflation-hedging assets. When inflation risk exists, portfolios should include assets that appreciate in high-inflation environments:

• Gold: A classic hedge against inflation. During high inflation, people turn to real assets to replace depreciating cash, driving gold prices higher.
• Commodities: Oil, agricultural products, tend to move in tandem with inflation.
• Real estate: Physical assets are less prone to depreciation; property values often rise with inflation.
• Cyclical stocks: Industries closely tied to economic cycles, which perform well in certain phases.

Diversify investments. Don’t put all eggs in one basket. No one can predict the economy with 100% certainty.

Follow data closely. Regularly monitor unemployment rates, price indices, GDP growth to gauge economic trends.

Conclusion: Be Cautious but Optimistic

Currently, Thailand’s economy shows no clear signs of stagflation. Tourism recovery, employment improvement, and moderate price declines are positive signals.

But the economy is always full of surprises. Any sudden global shifts—geopolitical conflicts, financial system collapses, supply chain disruptions—could change the picture.

For ordinary people, the most practical advice is: stay alert to economic developments, adjust asset allocations moderately to prepare for various scenarios, and trust that policymakers will take necessary measures. Stagflation is not insurmountable; the key is whether you are well-prepared.