2022: rapid growth slowdown, rising inflation & tightening

financing conditions
SEPTEMBER 15, 2022
→ Risks of a global recession in 2023-24? 3 possible scenarios.

• Baseline: consensus forecasts of growth and inflation. But

monetary policy tightening not enough to bring down
inflation in a timely fashion.
• Sharp downturn + Stagflation: upward drift in inflation
expectations → more synchronous monetary policy
tightening by major central banks. Global economy escapes
recession in 2023. But sharp downturn will not restore low
inflation by end 2024.
• Global recession: More rate hikes trigger a sharp re-pricing of risk in global financial markets
→ global recession in 2023.
If so, global economy could see large permanent output losses vs pre-pandemic. Severe
long-term impact for EMs already hit hard by the 2020 global recession.
 Every global recession since 1970 preceded by:
World Bank methodology:
• Significant weakening of global growth in
• Insights from previous global recessions
previous year
• Analysis of policy actions
• Sharp slowdowns/recessions in major
• Quantitative analysis of likely growth
economies. Growth forecasts for US, EU, China
outcomes
lowered significantly.
“… experience of previous
global recessions suggests
that additional shocks and/or
contractionary policy
measures could be the trigger
for the next global recession.”
US recession in 2023 will likely trigger a global recession…. Probabilities
based on annual data over the period 1970-2021. Global slowdown includes
both global recessions and global downturn
Policy (interest) rates during global recession
US Federal Reserve now has one mandate – fight inflation by turning real policy rate positive
Variable 2022 2023 2024 2025 Longer run Message unchanged since Jackson Hole
Chang in real 0.2 1.2 1.7 1.8 1.8
GDP (1.7) (1.7) (1.9) (NA) (1.8) Do 2 things to get inflation down and stop rate hikes
Unemployment 3.8 4.4 4.4 4.3 4.0 • Below trend growth
Rate (3.7) (3.9) (4.1) (NA) (4.0) • Softening of labor market to balance demand
PCE inflation 5.4 2.8 2.3 2.0 2.0 and supply.
(5.2) (2.6) (2.2) (NA) (2.0)
Core PCE Need to see clear evidence inflation moving back
4.5 3.1 2.3 2.1 NA
inflation down to 2%... Not clear how long this will take and
(4.3) (2.7) (2.3) (NA) (NA)
how much pain there will be…
Federal Funds 4.4 4.6 3.9 2.9 2.5
Rate (3.4) (3.8) (3.4) (NA) (2.5)
Supply side healing did not bring
FOMC “strongly committed to bringing inflation back down to down inflation as expected.
our 2% goal … We will keep at it until our job is done”.
Which means moving FFR into restrictive territory quickly (to Core PCE inflation now
put meaningfully downward pressure on inflation) and stay • 3mths trailing ann. 4.8%
there for some time. • 6mths trailing ann. 4.5%
• 12mths trailing ann. 4.8%
Now just moving into restrictive territory
9 past US recessions (ex. Covid) saw unemployment reach 6.2% - 10.8%
 Thailand Economic Outlook (KKP estimates)
Tourism the only driver
• Weaker consumption &
exports in 2023 from global
slowdown
• Key risks. Global slowdown,
oil price, inflation, rates

Key forecasts:
• GDP growth 2022: 3.4%;
2023: 3.6%
• Foreign tourists: 10mn in
2022 and 18-20mn in 2023.
• Inflation: 2022: 6%; 2023: 3%

Gradual policy rate hikes:

Peak 2%
Risks ahead for the Baht… outflows from both capital and account accounts
Thailand net foreign reserves (9 Sep 22): $241.76bn

Current Fx Res end US vs Thai policy rate hike timetable

account BoP period
1Q 2019 11,535.95 5,463.26 244,788.05 Date US policy Date Thailand
2Q 2019 4,310.98 103.73 250,298.41 rate policy rate
3Q 2019 10,774.56 6,758.36 253,668.70 27 Jul 22 2.5% 10 Aug 22 0.75%
4Q 2019 11,422.39 1,257.60 259,046.66 21 Sep 22 3.25% 28 Sep 22 ??
1Q 2020 11,207.56 4,478.66 260,913.69 2 Nov 22 30 Nov 22
2Q 2020 1,524.74 10,963.01 266,090.01 14 Dec 22
3Q 2020 8,022.54 3,296.61 275,203.11
4Q 2020 423.56 -384.81 286,476.37
1Q 2021 -1,854.81 -6,081.20 278,215.93 Thailand’s current account must
2Q 2021 -3,040.88 -2,464.45 279,848.76 register large surpluses from December
3Q 2021 -4,686.45 48.54 277,400.55 onwards largely from about 2mn tourist
4Q 2021 -1,436.30 1,400.55 279,156.76
1Q 2022 -2,189.19 1,989.28 272,930.46
arrivals per month
2Q 2022 -8,646.55 -9,346.46 250,942.50
(and exporters must exchange their
Jul-22 -4,067.58 -2,633.17 248,489.14
Aug-22 242,390.44 US$ earnings into Baht)