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Thailand's economy shrank because of the tsunami and earthquake in Japan
Growth was 2.6% in the three months to the end of June, from a year earlier, down from 3.2% in the first quarter.
Compared with the previous three months, the economy shrank by 0.2%.
The destruction in Japan resulted in a shortfall in parts for
manufacturers in Thailand, especially for auto makers, which hurt
exports.
"The net exports position remained a drag as expected, with
the post-quake impact on the manufacturing sector weighing on the
economy's performance." said Radhika Rao of Forecast Pte.
Foreign vs domestic demand
Thailand's exports are one of
the biggest contributors to the country's economic growth. But as key
markets like the US and Europe face a slowdown in growth, analysts said
the Southeast Asian economy may witness further slowdown.
"A key downside risk to growth is slowing global demand due
to debt problems in developed countries, which is likely to weaken
Thailand's export growth." said Usara Wilaipich of Standard Chartered
Bank.
However, analysts said robust domestic demand will continue to fuel growth.
"You still do have some domestic buffer coming in terms of consumption and investment," Wellian Wiranto of HSBC told the BBC.
Analysts said that higher incomes in the agricultural sector
and the restoration of consumer and business confidence due to political
developments in the country were among the key factors driving domestic
demand in the country.
"Overall we still see the economy expanding," HSBC's Mr Wiranto added.
Policy change?
While economic growth in Thailand has led to increasing
domestic demand, rising consumer prices have seen the central bank
tighten its monetary policy in the past year.
The Bank of Thailand has raised benchmark interest rate eight
times since July 2010, with the latest hike taking the cost of
borrowing to 3.25%.
However, analysts said the weaker-than-expected data may force the central bank to change its stance.
"The data could see the newly elected government pile
pressure on the Bank of Thailand to rethink its aggressive policy
approach," said Forecast Pte's Ms Rao.
The central bank is expected to meet later this week to decide on monetary policy.
Ms Rao added that even though she expected a rise in the cost
of borrowing, she "will not be surprised if the central bank cites
global volatility and soft Q2 GDP to sit on their hands this time
around."
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