The Thai industrial sector encountered a slowdown during 1H11. In 1Q11, production in key industries decelerated amid hefty inventories, hindering industrial sector GDP growth to only 1.7 percent YoY. The automotive industry cut production sharply in April and May due to auto-part supply disruptions in the wake of the Japanese triple disaster. Thus, the industrial-sector GDP may have shrunk in 2Q11.
Nonetheless, the Thai industrial sector may emerge from the doldrums in 2H11 thanks to swift recoveries in some industries in line with an improved manufacturing situation in Japan. KASIKORN RESEARCH CENTER (KResearch) forecasts that the 2H11 industrial-sector GDP may grow around 6.0-9.0 percent YoY,higher than our estimate of 0.5 percent growth for 1H11. However, full-year growth may be perhaps 3.0-4.5 percent, down from the 13.9 percent in 2010 (the highest in 10 years) due to severe problems in 1Q11 and a high base effect from last year.
Looking ahead into 2012, however, the industrial sector could grow 8.0-10.5 percent, buoyed by the start of projects previously invested for production increase (e.g., eco-car production) and other economic stimuli of the new government.
However, domestic industrialists should brace for the challenges ahead. This is particularly true of rising operating costs in line with expected increases in minimum wage levels and higher salaries for new graduates. KResearch holds the view that the government should undertake measures to cushion any impacts that these factors may have on SMEs, which are typically less resilient to abrupt changes than large businesses. SMEs may benefit little from lower corporate income tax rates, and government assistance funding may prove to be only a ‘quick-fix'. SMEs should be also encouraged to improve their productivity and competiveness through government-sponsored promotional privileges. They should include soft loans for purchases of new equipment or upgrades of existing machinery and systems, plus tax incentives (deductions and depreciation) on expenses related to investments in equipment and labor force skills training, as well as other measures to upgrade business capabilities and productivity to match rising wages. As these measures may require significantly large budgets, prudent guidelines for implementing these strategies may be needed and should be worthwhile, given that enhanced business potential is conducive to Thai economic growth over the long-term.