May 18 (Bloomberg) -- Thailand’s economic contraction probably eased in the first quarter as factories resumed production and tourists returned after the worst floods in almost 70 years, adding scope for interest-rate increases.
Gross domestic product shrank 0.9 percent in the three months through March from a year earlier, according to the median of 15 estimates in a Bloomberg News survey. That compares with a 9 percent contraction in the previous quarter. The report is due May 21 in Bangkok.
The Bank of Thailand last week raised its economic growth forecast for 2012 to 6 percent, and Governor Prasarn Trairatvorakul said earlier the monetary authority will refrain from further rate cuts because the pace of recovery is exceeding its expectations. Honda Motor Co. on March 31 said its plant in Ayutthaya province, which was shuttered after last year’s floods, will now run at full capacity to meet market demand.
“Thailand’s V-shaped economy is proceeding nicely,” said Frederic Neumann, Hong Kong-based co-head of Asian economic research at HSBC Holdings Plc. “Growth will be powered by rebounding investment and industrial activities, as well as consumption. All this comes at a cost. Inflation pressures are inevitably rising and we expect the central bank to hike the rate in the fourth quarter.”
The central bank left borrowing costs unchanged for a second meeting on May 2, and the International Monetary Fund said last week that Thailand should be ready to raise interest rates and exit fiscal stimulus when the recovery strengthens.
The baht has slipped 0.8 percent against the dollar this week. The benchmark SET Index fell 1.3 percent to 1,158.35 as of 10:01 a.m. local time, and is headed for its lowest close in more than a month. Overseas investors may pare their equity holdings “because they have been one of the biggest gainers in the region this year,” Stock Exchange of Thailand President Charamporn Jotikasthira said in a May 16 interview.
There are also risks stemming from Greece’s inability to form a new government after an inconclusive election, which could deepen Europe’s debt turmoil, adding to challenges from a China growth slowdown and an uneven U.S. recovery.
Singapore’s government yesterday said a “disorderly” debt default in Europe that would hurt the global economy can’t be ruled out, even as its gross domestic product rose an annualized 10 percent in the last quarter from the previous three months.
Weak European demand is particularly troubling for countries including Singapore and Thailand, where exports make up the equivalent of half or more of gross domestic product. Malaysia may report May 23 its first-quarter GDP growth slowed to 4.6 percent from a year earlier, according to the median forecast in a Bloomberg News survey. That compares with a 5.2 percent expansion in the previous three months.
Thai inflation slowed in April to the lowest in more than two years as state subsidies and easing food prices helped counter rising wages and oil costs, the Commerce Ministry said May 1. While industrial output and exports fell in March, consumer confidence and business sentiment have bounced back.
“Manufacturing output, tourism and private-sector spending all look to have risen strongly in the first quarter, reversing the slump in the fourth quarter,” said Sukhy Ubhi, an economist at Capital Economics Ltd. in London.
Still, inflation risks remain because of higher wages and oil and a faster-than-expected economic recovery, the central bank said this month. Prime Minister Yingluck Shinawatra has said she is worried about an increase in the cost of living.
Thailand’s economy, the biggest in Southeast Asia after Indonesia, probably grew 10 percent last quarter from three months earlier, compared with a 10.7 percent contraction in the previous period, according to the median forecast in a separate Bloomberg survey.
-- Editors: Tony Jordan, Rina Chandran
To contact the reporter on this story: Suttinee Yuvejwattana in Bangkok at Suttinee1@bloomberg.net.