Many economists have been hoping that Asia could drive global economic growth, but a surprise announcement that Thailand has sunk into deep recession has cast a shadow over these rosy predictions.


Thailand’s falling exports not the only cause for recession

Perhaps most importantly, Thailand’s recession is not being caused simply by falling exports. Domestic demand and business confidence are also drying up, suggesting that this slow down could end up being quite severe and long lasting. Still, the drop in local business confidence is likely linked to a drop in export demand. Shrinking demand from China, which is suffering from its own slow down, is a major component of the drop in Thailand’s economy.

Many economists and analysts were expecting a slight decline in the Thai economy, however, the actual breadth and depth of the recession is taking people off guard. Through the first quarter, the economy contracted by 1.7%. Through the second quarter, the economy contracted by only .3%. Yet, for an emerging economy that grew by 6.4% in 2012, such a drop off is causing worries.

Also see: ASEAN Well-Positioned To Withstand China Slowdown

Thailand seeing increase in investments

In a world of increasing economic risk and uncertainty, Thailand has generally been a bright spot. The country has seen increasing investments from companies such as Ford. Tight fiscal policies and sound money management, in combination with the recently stable political system, has made the nation a  favorite among international investors.

Most S.E. Asian states are heavily reliant on exports, and Thailand is no exception. Singapore and Malaysia are both also heavily reliant on exports. With the global economy slowing, these countries could suffer from deep recessions. Singapore has seen its exports contract sharply, though the economy continues to grow due to local consumption. Malaysian exports dropped by nearly 7% in June, 2013. Such events would likely result in a slow down in regards to business investments.

Still, it is unlikely that large numbers of people will be laid off. Generally speaking, labor markets are tight across S.E. Asia. This is especially true for skilled labor, such as people with college degrees. While companies in the United States and Europe will lay off skilled labor, knowing that they can rehire skilled applicants in the future, companies in Asia are less willing to do so.

Slowdown in emerging Asian markets

Either way, a slowdown in emerging Asian markets represents a huge risk to the global economy. These markets have been viewed in recent months as a source of economic growth. As Western companies look to cut costs by investing in Asian nations, economic growth was trending upwards. This was leading to rising wages and thus increased consumer consumption. Now, however, contracting economies could derail economic growth.

With leaders across the world looking for new sources of growth, a decline in S.E. Asia will not be taken lightly. Traditionally, declines in S.E. Asian economies have attracted little attention. The 1997 Financial Crisis, for example, failed to spread outside of Asia. With traditional western markets on the decline, however, many economists have pointed to Asia as a source of growth.

Now it appears that such predictions have been slightly unrealistic. Asia is still highly dependent on Western markets. With such markets declining, demand for exports is slumping across S.E. Asia. This could eventually lead to a decline in local consumption. If this occurs, economists across the world will be forced to reconsider there economic growth strategies.