Thai economy unexpectedly shrinks in second quarter

Thailand's economy unexpectedly shrank in the second quarter from the previous three months, hurt by weakness in auto and electronics output after Japan's earthquake and tsunami disaster, official data showed on Monday. The unexpected weakness raises questions over how long the Bank of Thailand will continue to tighten policy, especially as the global economy sputters and Thailand's newly elected government puts pressure on the central bank to hold down rates.
Southeast Asia's second-largest economy contracted by 0.2 percent, worse than the modest 0.5 percent growth expected by most economists and compared with a 2.0 percent expansion in the first quarter, reflecting the impact of Japan's earthquake in March, which caused global supply chain disruptions. From a year earlier, Thailand's economy grew 2.6 percent, below economists' forecast of 3.6 percent as growth in household consumption proved lower than expected.
Most Asian countries have posted weak quarterly growth. Malaysia slowed to 4.0 percent in the second quarter from a year earlier, while Singapore contracted an annualised 6.5 percent from the previous three months. But Indonesia expanded at a robust 6.5 percent from a year yearlier.
Thailand's central bank, one of Asia's most hawkish, has raised its benchmark interest rate eight times to 3.25 percent since July 2010, when it started to push up the rate from a record low of 1.25 percent. Most economists expect another quarter-point increase at the next meeting on Wednesday. Opinion is divided over whether the Bank of Thailand will pause after that meeting.
"External demand may remain subdued in coming months, but domestic growth will offset it. Generally we do not see the Bank of Thailand pausing in August, but risks have risen," said Rahul Bajoria, an economist at Barclays Capital in Singapore. Annual core inflation in Thailand was 2.59 percent in July, moving towards the top end of the central bank's target range of 0.5-3.0 percent, which guides monetary policy.
The baht was steady at 29.80 per dollar at 0300 GMT while bond yields were slightly higher, with the benchmark five-year bond up one basis point at 3.38 percent. The stock market was down 0.02 percent. The National Economic and Social Development Board (NESDB), which compiles the GDP data, now expects the Thai economy to grow between 3.5 and 4.0 percent this year rather than the 3.5-4.5 percent projected in May.