Thailand’s Economy Weakened by Political Unrest

BANGKOK – Thailand’s economic activity in April remained subdued by concerns over prolonged political uncertainty, as household debt continued to weigh on consumption and spending.

Foreign and domestic businesses deferred investment last month while waiting for clearer signs of political resolution, causing the private-investment index to decline 4.7% from the same period last year, the Bank of Thailand said Friday.

Thailand’s high household debt level, which stood at about 80% of its gross domestic product, and income shortfalls—particularly among farmers hurt by declining commodity prices—whittled consumption and spending. The Private Consumption Index fell 0.8% on year because of a decrease in spending on durable items, according to the Thai central bank’s monthly economic report.

Concerns over the months long political conflict have rattled business confidence and slowed investment in the Southeast Asia’s second-largest economy after Indonesia. The Thai economy contracted 2.1% in the first quarter compared with the fourth quarter of 2013.

Seven months of political conflict between loyal supporters of former Prime Minister Yingluck Shinawatra and her opponents, led by Suthep Thaugsuban, came to a head May 22 when the military seized power and set up its governing body.

The junta, led by Thai army chief Gen. Prayuth Chan-ocha, has moved swiftly to try to restore business confidence and stimulate the economy. The ruling military has appointed former central banker Pridiyathorn Devakula its chief economic adviser and plans to release the country’s new economic road map next week.

The military said it is aiming for economic growth of at least 2% growth this year.

Thailand’s benchmark stock index has reacted relatively well to the new leadership, climbing just less than a percentage point in the past week.

“The coup could benefit [the economy and investment] but it still depends,” said Mathee Supapongse, a senior director at the Bank of Thailand. “There’s more clarity now about several projects that had been stalled. Many projects have begun to move forward.”

However, restoring foreign investor confidence can take time, as the international community is wary of the military’s seize of power, said Mr. Mathee.

In April, the country’s manufacturing production index contracted 3.9% largely because of sluggish auto production, the bank said, as an increase in foreign orders couldn’t compensate for the decrease in domestic appetite. The automobile sector accounts for about 11% of the country’s annual output.

The tourism sector, which comprises about 9% of Thailand’s economy, picked up in April compared with the previous month, thanks partly to a boost from Thailand’s Songkran water festival. Foreign tourists also gained confidence after the state of emergency ended in late March.

The current account posted a deficit of $643 million in April, compared with a surplus of $2.9 billion in March. Merchandised exports gradually recovered, but falling commodity prices and weakening Chinese demand hurt the shipment of agriculture products.

Fewer imports in light of slower growth is likely going to keep Thailand’s current account in the surplus this year despite this month’s deficit, said Rahul Bajoria, an economist at Barclays.

“Exports are still the main growth driver this year even though [they are] expected to grow less than 4.5% as previously projected,” Mr. Mathee of the Bank of Thailand told reporters in a news conference.

The Bank of Thailand’s monetary policy committee is expected to meet June 18 to decide on its key policy rates, which is currently at 2%. Mr. Bajoria at Barclays said the bank may not cut rates further as expected given signs that domestic demand is bottoming against the backdrop of modest recovery in tourism and industrial output.

Write to Warangkana Chomchuen at warangkana.chomchuen@wsj.com