Is the stagflation situation really coming to Thailand now?

Many people may have heard the term Stagflation from economic news, but do they truly understand what it is and why it matters for our investments? If we know that this situation could occur in Thailand, we should prepare well.

What exactly is Stagflation?

Stagflation results from the combination of two opposing economic conditions:

Stagnation (Economic slowdown) means the economy is not expanding, unemployment is rising, and consumers have less purchasing power. Inflation (Inflation) refers to the general rise in prices of goods. Normally, when the economy is in a downturn, prices tend to fall, but Stagflation is a situation where prices are rising even as the economy contracts.

The simple reason is that when the economy slows down, companies can’t sell their products, so they have to shrink and lay off workers. Unemployed workers have less spending power, leading to decreased demand. Businesses sell less and less. But during Stagflation, companies can’t sell well but face high costs, so they raise prices to consumers. Prices go up instead of down. This is called “Cost Push Inflation,” which can be caused by rising oil prices or high electricity costs.

An old but not forgotten example from 1970s America

The United States experienced this phenomenon in the 1970s when Arab countries embargoed oil in protest of U.S. support for Israel, causing global oil prices to skyrocket.

As a result, U.S. inflation soared past 10%, while unemployment approached 10%. The government tried various solutions but failed until Paul Volcker, head of the Federal Reserve, raised interest rates to 18% to curb spending and reduce inflation.

The side effects were severe: a deep recession, housing prices plummeted, and the entire Latin American region nearly went bankrupt.

Is Thailand at risk of Stagflation now?

Wondering if Thailand is heading toward Stagflation? Let’s look at three indicators:

1. Is Thailand’s GDP growing?

The Bank of Thailand forecasts that the Thai economy will grow by 3.7% in 2023, supported by:

• A clear recovery in tourism, expecting 22 million foreign visitors
• Increased domestic consumer spending, especially as unemployment decreases

But caution is needed regarding the slowdown of the global economy, which could weaken Thai exports.

2. What is the unemployment rate?

Good news: Thailand’s unemployment rate is trending downward. Currently, about 490,000 people are unemployed, only 1.23%, which is very low compared to pre-COVID levels.

Long-term unemployment has also decreased from 180,000 to 100,000, indicating people are finding jobs.

3. How high is inflation?

The Consumer Price Index in February 2023 was 108.05, up 3.79% from last year. This is good news because it is slowing down.

In January, inflation was 5.02%, but the next month it decreased to 3.79%, showing a continuous decline.

Fuel prices have fallen, and many fresh food prices remain stable, helping to keep inflation from hurting too much.

Preliminary summary: Currently, Thailand has a low risk of entering Stagflation because the economy is still growing, unemployment is decreasing, and inflation is trending downward.

Risks we need to watch out for

Although Thailand is in a safe zone, unseen risks still exist.

Factors that could lead to Stagflation:

1. Continued high costs – Electricity costs remain high, so companies raise prices instead of absorbing costs themselves.

2. Supply chain disruptions – Foreign factories are not fully back to normal, causing shortages and high prices.

3. High household debt – Thais have high debt levels. If interest rates rise, life becomes stressful, spending decreases, and the economy contracts.

4. Global economic instability – Banking crises in the U.S. and Europe could spread, reducing Thai exports.

If Stagflation really hits, how should we invest?

If the economy enters Stagflation, consumers will be heavily burdened, and investors need to change strategies.

Assets to “hedge”

In a Stagflation environment, look for assets that “benefit from inflation,” such as:

Gold – A classic inflation hedge. When inflation is high, people buy gold to preserve value. Gold prices tend to reach high levels.

Commodities – Such as rice, oil, metals. When economic activity raises costs, raw material prices tend to increase.

Real estate – Houses, land, buildings, which tend to keep pace with inflation. As money loses value, property prices tend to be relatively stable.

Cyclical stocks – Companies that sell essential goods and services, like HVAC, convenience stores, gas stations, office supplies, which have steady demand over time.

How to protect against Stagflation without panic

1. Increase domestic productivity – If the government can boost productivity, it will reduce inflation and increase employment simultaneously.

2. Central banks and governments must cooperate – Ignoring the problem will only make it worse. The lessons from the 1970s are a harsh reminder.

3. Monitor inflation closely – The Bank of Thailand must keep a close eye. If inflation rises, decisive action must be taken quickly.

Ultimately, does Thailand really need to worry?

Evidence suggests: Thailand does not need to worry about Stagflation right now.

Why? Because:

• The economy is still growing, not contracting
• Unemployment is decreasing steadily
• Inflation is trending downward, not upward
• Tourism is recovering, supporting the economy

But this does not mean we can sit back and wait. Investors should prepare their portfolios, increasing allocations in gold, commodities, and real estate. If unexpected events occur, having these assets as protection will be beneficial.

Global economic uncertainty Stagflation could happen, but with enough information and preparation, there’s no need to fear.