Thailand is watching the economic aftershocks of the war in the Middle East with growing unease. As temporary price freezes disappear and energy becomes more expensive, fears are growing of a toxic combination of weak growth and rising inflation. Households and small businesses, in particular, are feeling the pressure on their wallets increasingly strongly.
The new government says it wants to prevent stagflation, but economists, industry, hotels, and investors see the risk increasing rapidly. They point to expensive oil, weakening consumption, vulnerable exports, disappointing investments, and an uncertain interest rate environment. If the conflict persists, Thailand could end up in a prolonged economic danger zone for many families.
The government wants to intervene, but room is limited.
Now that the Songkran holiday is over and price freezes for energy and other products have been phased out, Thailand is considered particularly vulnerable. Companies warn that they may have to raise their prices to absorb the higher costs, while the disposable income of many households remains the same or even falls. The new government, led by Finance Minister Ekniti Nitithanprapas, says it wants to prevent stagflation but acknowledges that the risk is real.
Ekniti emphasizes that budgetary discipline must be maintained. At the same time, he leaves the door open to allowing the national debt to exceed the 70 percent of GDP limit if truly necessary. Unnecessary expenditures in the budget for the next fiscal year must therefore be scrapped. During the recent policy debate, opposition parties also asked how new taxes could be introduced in such a way that they generate sufficient revenue while being sufficiently targeted to curb a stagflation scenario.
When Thailand technically enters stagflation
According to Thanavath Phonvichai, chairman of the University of the Thai Chamber of Commerce, there is no hard, generally accepted limit for stagflation. In theory, economic growth of around 2 percent is considered stagnation, while inflation above 5 percent is seen as high. Expectations for Thailand are already worryingly low. The National Economic and Social Development Council forecasts only 0,2 to 1,4 percent growth this year. The UTCC expects even 0 to 1,5 percent, with a chance of contraction if the war in the Middle East persists.
Thanavath does not believe inflation will exceed 4,5 percent this year, because the government will likely try to control electricity prices and keep energy affordable for various sectors. Technically, however, he believes stagflation could already be occurring if inflation rises above the 3 percent target and growth hovers around 1 percent or lower. The real threat only arises if that situation is not temporary but persists for two to three years. At that point, he argues, it will become difficult to control inflation, and the damage to businesses and families will mount rapidly.
Trade, support measures, and investments must make the difference.
Thanavath believes that the Ministry of Trade should be able to use price controls and export quotas to curb inflation, for example in the case of palm oil. At the same time, he warns that the government must consult with companies in constant consultation. If price regulation places too heavy a burden on margins, businesses cannot continue operating normally. This can lead to layoffs and ultimately to more non-performing loans. Exports must also be closely monitored, while the Ministry of the Interior and the provincial trade offices must actively monitor supply and demand to better distribute shortages and surpluses.
Regarding economic support measures such as Khon La Khrueng Plus, the new co-payment scheme on the table for May, he says that the government must not jeopardize its credibility. If the situation in the Middle East improves, implementation in May could provide a welcome boost. If the crisis persists, postponement seems more likely. According to him, a middle ground is possible: starting with a smaller budget and helping vulnerable groups first. The government must then simultaneously avoid excessive spending and build up financial reserves for emergencies.
Economists already see risk rising in the second quarter
Independent economist Aat Pisanwanich believes the government needs to invest faster to address the energy crisis. He warns that Thailand could enter a mild form of stagflation as early as the second quarter. According to him, inflation could rise to 3 to 4 percent, while growth falls back to around 1 percent. Even if the conflict in the Gulf region ends quickly, he expects oil prices to remain high for another one to two years, around 100 dollars per barrel. That would continue to slow inflation, consumption, and the overall economic recovery.
According to him, exports and tourism are also taking a hit due to the global slowdown caused by expensive energy. Nevertheless, the new phase of the co-payment scheme of the government of Anutin Charvirakul could still offer some counterbalance. The first round, with approximately 40 billion baht in budget funds, yielded about 0,2 percentage points of extra GDP growth. If the new phase pumps about 100 billion baht into the economy, it could contribute an estimated 0,4 percentage points this year. But Aat also points to a more persistent problem: for ten years, Thailand has been at the bottom of the list among the five largest ASEAN economies when it comes to foreign direct investment. Singapore, Indonesia, Malaysia, and Vietnam attract more capital. According to him, this is due to high production costs, political instability, an undereducated workforce, and constantly changing policies.
Industry and hotels cut costs to stay afloat.
Kriengkrai Thiennukul, acting chairman of the Federation of Thai Industries, does not believe that Thailand is already in full stagflation in the second quarter. However, he acknowledges that high fuel costs are pushing up the prices of goods and services, while the economy remains weak. Because the Oil Fuel Fund still has a deficit, it is difficult to maintain subsidies. Nevertheless, the authorities have persuaded refineries to lower the factory price of diesel. As a result, the sharpest rise in fuel costs has softened somewhat, and essential products also remain more affordable.
According to Kriengkrai, the business community is trying to preserve employment as much as possible, although some companies are postponing investments, production, and new hires. Manufacturers are reducing their operating costs, switching more to renewable energy, and working with stricter risk plans. In the tourism sector, Watcharapong Khunpluem of the Thai Hotel Association sees the same pressure. Travelers will likely become more cautious with spending after Songkran, as the cost of living, goods, and transportation threaten to become more expensive. As a result, both leisure and business travel may decline. Hotels are therefore choosing to keep their room rates stable, but to cut costs more aggressively internally, build up larger inventories, review their budgets more frequently, employ more temporary staff, and extend internship programs. Green measures, such as glass bottles instead of plastic, are also being used more emphatically to reduce costs.
Investors fear that war will turn into a financial crisis
Natthawut Chantanajulapong of Krungthai Xspring Securities sees a shift in the financial markets from purely geopolitical fear to a broader systemic threat. According to him, Brent oil prices are now moving within a wider range and no new peaks have been reached since the first week of the attacks. As a result, the market seems to believe that not only war nerves, but primarily structural financial risks, pose the major danger. Investors are no longer responding with a classic flight to safe havens, but with broader waves of selling across multiple asset classes.
According to him, this points to a fear of persistent inflation, which could force central banks worldwide to keep monetary policy tighter or even tighten it again. On top of this comes the risk of defaults and liquidity problems, which could escalate into a credit crisis. Nuttaporn Triratanasirikul of the Kasikorn Research Center therefore expects that the global easing cycle is effectively over. She believes the Bank of Thailand will maintain the policy rate at 1 percent until the end of 2026, following the surprising rate cut in February. Furthermore, Soraphol Tulayasathien of the Thai stock exchange expects the US Federal Reserve not to lower interest rates this year and could even raise them if inflation rises further.
Everyday products are becoming more expensive
The Trade Policy and Strategy Office of the Ministry of Trade expects that higher energy and raw material prices will gradually become reflected in many consumer prices. In this regard, reference is made to the pattern also seen at the beginning of the war between Russia and Ukraine in 2022. The expected price increases fall into two broad groups, with an outlier above them.
The category with price increases of 0 to 5 percent includes, among others:
- ready-made coconut milk
- flavorings such as fish sauce
- drinking water, coffee and tea
- detergent, toilet cleaner and garbage bags
- soap, shampoo, toothpaste and toothbrushes
- razor blades, toilet paper, sanitary pads and disposable diapers
In the category with expected increases of 5 to 10 percent, the government mentions:
- instant coffee powder
- soft drinks
- fabric softener
- dish soap
Vegetable oil stands out. A price increase of more than 10 percent is expected there. For many Thai households, inflation thus hits precisely the everyday expenses that are almost unavoidable.
Thailand is therefore not in the midst of a full-blown stagflation crisis, but the alarm signals are growing louder. The combination of expensive energy, weak growth, fragile investments, and rising consumer prices is putting the country under pressure. If the conflict in the Middle East persists, the government will need to act quickly and precisely to prevent temporary economic damage from turning into a prolonged crisis.
Source: Bangkok Post
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