SCB EIC, a research centre under Siam Commercial Bank (SCB), has raised concerns that the economy might be on the verge of entering a "lost decade".
Drawing from Japan's experience, SCB EIC warns that Thailand could face economic stagnation extending until 2050.
The term "lost decade" is used to describe Japan's economy during the 1990s, characterised by two key features: (1) prolonged low economic growth and (2) a loss of confidence among the Japanese people that the economy would recover to its former growth levels, leading them to save more and spend less.
Japan entered its lost decade following the asset price bubble crisis (1986-91).
The asset price bubble crisis ultimately impacted household balance sheets, resulting in Japan experiencing an extended economic stagnation lasting over three decades.
Comparing the Thai economy since the outbreak of the Covid-19 pandemic with Japan's economy when the asset bubble burst, it is evident that both countries saw their real GDP and private sector confidence deviate from pre-crisis trends in a similar manner, with no signs of returning to pre-crisis trends.
"Thailand's economy is likely to enter into such a pattern during the post-pandemic period with real GDP and private confidence deterioration," warned SCB EIC chief economist Somprawin Manprasert.
Thailand's economic recovery ranks 162nd out of 189 economies post-pandemic. Looking ahead, the Thai GDP growth rate is expected to be around 2.5-3% this year, compared to an average of 5.4% between 2000 and 2006 and 3.1% during 2012-18.
"We compared the onset of Japan's lost decade with Thailand's post-pandemic economy and found a similar pattern. This is quite worrying," he said.
Thailand's labour productivity showed slow growth before the pandemic and has remained steady post-pandemic.
Simultaneously, Thai financial institutions have faced higher credit cost risks following the end of the government's soft loan measures in 2023.
Consequently, banks have slowed loan growth, leading to financial accelerator pressures.
According to SCB EIC, Japan used to experience a financial accelerator, particularly during periods of economic and financial liquidity constraints.
Both the business and household sectors struggled with weaker debt repayment abilities, leading to higher levels of bad debt and financial instability.
The financial accelerator refers to the mechanism through which changes in the financial conditions of firms can significantly affect their investment decisions and, consequently, the overall economy.
This effect is particularly pronounced during periods of economic downturn or financial crises.
In this scenario, banks focused primarily on managing bad debt to control asset quality.
Due to higher credit risk among borrowers, banks slowed down loan expansion, making it harder for businesses to access financial resources. This, in turn, affected new investments, productivity and economic growth.
According to Mr Somprawin, the financial accelerator has partially contributed to Japan's economic downturn and lower incomes. As a result, the private sector has prioritised saving over spending.
For the Thai economy, potential growth would deteriorate in the longer-term, while the limitation of loan accessibility would also impact the financial status of Thai people, he said.
According to data from the National Statistical Office in 2023, 41% of households faced insufficient income, an increase from 32% in 2021, with a large proportion being lower-income households. However, the ratio of middle-income households also increased over this period.
Additionally, the proportion of small and medium-sized enterprises facing insufficient income increased by 5% between 2021 and 2022.
"In this scenario, we are concerned that the Thai economy is entering a 'lost decade'. As Japan experienced, Thailand could be in a similar situation for the next 30 years until 2050," Mr Somprawin said.
However, he noted that Japan is expected to exit its lost decade eventually through reforms in the investment, export and manufacturing sectors.
Collaboration between fiscal and monetary policies is another key factor that will help Japan reach the final stage of its lost decade, he added.