Inflation could prove a worry for Thailand: DBS

Accordingly, economy is expected to fall abruptly in 3Q.

In a release, DBS revealed that domestic demand and export volumes accelerated in May implying above-trend growth continued in the second quarter. Private consumption grew by 4% (MoM, sa), private investment by 1.8% (MoM, sa) and export volumes (total and ex-gold) by about 7% (MoM, sa).

Here's more from DBs:

Import volume growth was particularly strong registering growth of 22% (MoM, sa) but this ex-gold or ex-crude grew by a more reasonable 8-9% MoM, sa. Nominal export value data mirrored the strength in value data. To some extent, the growth in consumption and investment are temporary and related to replacement demand that will wear off leading to a drop in domestic demand eventually.

Accordingly, GDP growth could post a strongexpansion in second quarter but third quarter could abruptly fall to trend or even below trend rates. As such, despite the strength in May and in second quarter, our 2012 GDP growth is kept unchanged for now at 5.5%.

Administrative policy measures have kept inflation capped thus far in the first half. CPI inflation printed just 2.6% YoY yesterday and averaged 2.9% in 1H even as government policies such as wage hikes (10-40%) boosted consumption. Administrative measures to limit inflation (such as fuel price policy) helped as did the fall-off in international crude oil prices. Moderation in food inflation also helped with average contribution of food inflation to CPI (MoM, saar) in 1H12 falling to between one-half and one-third the norm (0.8%-pt vs 2% norm).

Ahead, inflation is still expected to accelerate in the second half as commodity prices rise and domestic fuel prices are raised. But the weak first half could cap inflation in 2012 to 3.2% (vs 3.4% forecast previously). The increase in wages and other such expansionary fiscal policies to boost consumption will eventually push inflation higher. Thus, inflation could prove to be a worry in 2013 with full year average inflation at 3.7%.

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