On the external side, even though export growth in January is especially robust at 33 per cent, the likelihood of seeing a repeat of spectacular export performance is slimmer this year, as global growth is projected to slow down considerably. In fact, export growth in February has already decelerated to 16 percent. Going forward, the risk factors that can weigh on the ability of the Thai economy to expand will likely come from the US recession and high oil and commodity prices. In an increasingly integrated world, the slowdown in US demand can impact on Thailand’s export prospects. Despite the Fed’s aggressive interest rate cuts and innovative measures to forestall the rise in mortgage interest rates, substantial downside risk remains. Most US watchers agree that the US economy may not be able to avoid a recession; indeed, employment, house price and business confidence data all point to a possibility that it is already in a recession. It’s only a matter of how deep and how long this process will last. But while the US economy weakens substantially with worsening prospects, global price pressure is not letting off. Crude oil prices continue to rise as world oil demand strengthens in the face of limited global production capacity. In this tight demand-supply situation, adverse geopolitical events, unfavorable weather condition or further dollar slide can spike up oil prices. This phenomenon is not new. In fact, continued demand pressure coupled with supply constraint and other uncertainties have led countries to find substitutes to fossil fuel.

BIS Review 35/2002  1  This sequence affects different categories of assets (commercial property, residential property, equity), whose impact on the real economy and transmission channels differ. Commercial property seems particularly linked to the business cycle, while residential property has a larger impact on consumption. Equity prices are intertwined with business profits and investment but are also related to spending through wealth effects, depending on the role equity plays in the determination of financial wealth. This interaction between credit cycles and asset price bubbles poses a number of challenges for the authorities and regulators, both in the monetary policy and financial stability domains. In the upswing, inflationary pressures related to excessive credit growth are compounded by financial imbalances resulting from unwarranted optimism on the part of corporations and households and excessive risktaking on the part of financial institutions. In the downturn, recessionary and deflationary forces are aggravated by credit contraction as a result of excessive risk aversion by lenders. The possible explanatory factors of this potential amplification of the cycle in the financial sector are many-faceted and complex. First, heightened competition in the banking sector and in financial markets leads in an upturn to riskier strategies that are only corrected when the rise in bad debts becomes evident in the downturn. Second, there seems to be a tendency for economic agents to overreact to changes in their environment, leading to over-optimism in times of plenty and over-pessimism in bad times. Third, herding usually reinforces existing trends and causes overshooting.