Thailand at risk of 'deflation' as economy stagnates, investment and consumption fall

Some economists are concerned about deflation, a phenomenon where the general price level of goods and services declines. Deflation can impact the economy in various ways, such as causing consumers to delay spending, leading businesses to postpone investments, and ultimately resulting in economic stagnation.

Thailand's inflation situation continues to decline, with the latest inflation rate for May 2025 recorded at -0.57% year-on-year, marking the second consecutive month of decline. Meanwhile, core inflation has risen by 1.09%, diverging from the trend in many countries where inflation has started to rise again and return to more normal levels.

This leads to an important question: is the persistent weakness in inflation a "temporary" sign or a "permanent" trend, and could it lead Thailand towards a "deflationary" environment?

Pipat Leungnaruemitchai, Chief Economist at Kiatnakin Phatra Financial Group, explained that the ongoing negative inflation in Thailand is not just a temporary result of product prices. The bigger picture reflects a sustained lack of "inflationary pressure" in the economy for a prolonged period.

The current negative inflation is not a recent occurrence. Inflation in Thailand has been slowing for the past decade, not just in the current year, with core inflation consistently below the central bank's target. This is not a short-term issue but rather a sign of deeper structural problems in Thailand's economy.

"We don't have inflation due to demand. There's no price pressure, which reflects the inability of businesses to pass on costs to consumers. In simple terms, no one dares to raise prices because consumers don't have enough money to absorb higher costs."Therefore, the ongoing low inflation, which is below the target range, affects not only economic numbers but also the confidence of consumers, businesses, and investors. It leads to a reduction in confidence across various sectors.

Businesses are struggling with a lack of "pricing power" and are unable to raise prices for goods or services. Landlords are unable to increase rent in an environment of consistently low inflation. In terms of investment, there may be a decline when product prices don't increase.

Investors lack the motivation to invest for future profits, which in turn affects "wages" that may not rise in the absence of inflation. Labour income remains stagnant, reducing consumer purchasing power and halting the circulation of money in the economy.

Ultimately, this results in a further decline in economic confidence, as both consumers and businesses delay spending and investment decisions.

Pipat also highlighted that the ongoing low inflation presents a risk of Thailand following in Japan's footsteps, which fell into a deflationary trap after the economic bubble burst in the 1990s. This resulted in a prolonged period of economic stagnation that was difficult to recover from.While Thailand has not yet entered full deflation, there is a “risk” of the country slipping into such a cycle soon if inflation remains persistently below the target range and there is no sign of recovery in domestic demand.

“We are at significant risk of repeating Japan’s experience. In Japan’s case, when prices remained stagnant, people were reluctant to spend or invest, and the economy remained stuck for decades. If we do nothing, we will face the same fate. Therefore, we must act before deflation becomes evident, as once it sets in, it could take decades, like Japan, to recover,” he said.

Ultimately, what needs to be done is to maintain “price stability” with inflation at a low but stable level, not high enough to erode consumers' purchasing power, but not too low that it fails to provide economic stimulus. Inflation reflects confidence in the economy as a whole, showing that the economy is still active, people are spending, businesses are investing, and a clear future is in sight.

Amonthep Chawla, Assistant Managing Director and Head of Research at CIMB Thai Bank, stated that the ongoing decline in inflation is not a comforting sign. This reduction in inflation is not just due to temporary factors like falling vegetable and oil prices but reflects a weak economic structure, particularly the slow recovery of domestic purchasing power. This could result in inflation remaining low and potentially failing to meet the Bank of Thailand’s target within this year.

The reduction in inflation is not merely a temporary effect of lower vegetable and fruit prices; the "flood of Chinese goods into Thailand" is also a factor that continues to drive inflation down. Many Thai businesses are facing price competition from “cheap Chinese goods” flooding the Thai and ASEAN markets, which is pressuring local companies to keep prices down, even when their costs rise.

“These are structural issues that require direct government measures, such as import taxes or controlling price dumping from China. Simply relying on the Monetary Policy Committee (MPC) to address this through interest rate cuts will not solve the problem,” he added.

The decrease in inflation also reflects the slow recovery of household incomes in Thailand, as people still feel financially insecure due to high debt and stagnant incomes.

Is Thailand in a state of "deflation" today? The answer is "not yet," but if inflation continues to remain negative, it could signal the beginning of deflation in the near future. With people anticipating further price reductions, there is a risk of delays in purchasing decisions as consumers wait for prices to drop further. This phenomenon is the result of the "low inflation trap."

What impact does low inflation have? It removes the incentive for businesses to invest, stock up on products, raise prices, or increase production capacity. These factors create a cycle that causes the economy to stagnate, as there is no momentum pushing it forward. This is a significant concern.

Currently, Thailand’s economy faces both "external and internal battles." On the domestic front, there are issues like weak internal factors, household debt, and competition from China. Thailand also faces "external battles," such as the ongoing trade wars. Therefore, the outlook for Thailand's economy in the second and third quarters of this year remains risky, with continued low growth and declining trends.

"Although low inflation may reduce costs for consumers and encourage spending in some areas, excessively low inflation has a significant impact on investment. When prices cannot rise and are expected to continue declining, people will delay investments and purchases, expecting even lower prices. This overall situation will keep the Thai economy in a prolonged stagnation."

Finally, in such a low-inflation environment, the policy interest rate becomes a major point of focus. It is anticipated that at the MPC meeting on June 25, there may be a need to "cut interest rates" by another 0.25% to help maintain confidence in the economic system.

Wichchulada Phakdisuwan

(2025/06/10-00:00)