UPDATE 2-Thailand escapes recession, questions cloud recovery

* Thailand emerges from recession in Q2 like Asian neighbours

* Domestic demand, government spending key growth drivers

* Economy seen rebounding to positive annual growth in Q4

* Political risk, weak global demand could impede recovery (Adds details on government spending)

BANGKOK, Aug 24 - Thailand's economy emerged from its worst recession in 11 years in the second quarter, growing 2.3 percent from the first quarter as manufacturing rebounded, adding to signs of recovery in Asia's export-reliant economies.

But state officials and economists said political uncertainty could impede the recovery by continuing to squeeze tourism, which has a knock-on effect on private consumption, and they expected the central bank to hold off on further interest rate cuts.

Global consumer demand also remains frail, which could curb an export recovery.

Official, seasonally-adjusted GDP data largely confirmed figures provided to Reuters last week and were in line with economists forecasts, showing Southeast Asia's second-largest economy benefiting from improving trade flows.

"Exports showed signs of improvement but politics remains a factor of concern that could affect investment confidence. This is reflected by private investment which has not improved much," said Ampon Kittiampon, head of state planning agency National Economic and Social Development Board (NESDB).

"But the Thai economy should have passed the worst of its contraction. Both consumption and investment started to turn positive in the second quarter in line with the recovering global economy," he told a news conference.

Japan, Singapore and Hong Kong also pulled out of recession in the second quarter, although recoveries in those countries are also expected to be gradual. Last week, Singapore reported the smallest drop in electronics exports in four months.

Thai household consumption rebounded 0.8 percent, seasonally adjusted, in the second quarter from the first, after contracting 3.4 percent in January-March.

"The sustainability of a recovery remains tentative, given political uncertainty," said Usara Wilaipich, economist at Standard Chartered Bank. "Meanwhile, external demand is unlikely to return as an engine of growth in the future." Several analysts said Thailand's economic outlook depends on how long fugitive former Thai Prime Minister Thaksin Shinawatra challenges Prime Minister Abhisit Vejjajiva, and whether his campaign backed by thousands of red-shirted street protesters undermines the confidence of investors and consumers. [ID:nBKK495882]

The June quarter growth, which followed a 1.8 percent contraction in the previous quarter, was in line with a Reuters poll of six economists who had forecast median seasonally adjusted gross domestic product growth of 2.3 percent [ID:nBKK467210].

For a graphic of on the GDP data, click on

http://graphics.thomsonreuters.com/089/TH_GDP0809.gif

GOVERNMENT SPENDING HELPS, BUT FOR HOW LONG?

Thailand's $260 billion economy contracted 4.9 percent in the second quarter from a year earlier after a 7.1 percent fall in the first, the data showed. Ampon said he expected annual growth to return in the fourth quarter by 2 to 3 percent.

Manufacturing rebounded, rising 6.2 percent seasonally adjusted after a 6.6 percent contraction in the first quarter.

Exports of goods and services fell by 4.3 percent, improving from a first-quarter drop of 6.9 percent, seasonally adjusted.

Government spending also helped. The second quarter benefited from a surge in government spending on infrastructure following a 117 billion baht ($3.4 billion) mid-year supplementary budget bill approved by parliament, the planning agency said.

Government spending rose a faster 5.9 percent in the quarter from a year earlier, up from a 3.6 percent rise in the first quarter. Public investment jumped 9.6 percent after contracting 9.1 percent in January-March.

Thailand's state planning agency forecast the economy would contract between 3.0 percent and 3.5 percent in 2009, revising its May forecast of a 2.5 percent to 3.5 percent contraction. GDP rose 2.6 percent in 2008. [ID:nBAK000867]

Exports have been falling at a double-digit pace since the last quarter of 2008 [ID:nBKK321274] on shrinking demand from the United States, European Union, and Japan, but they have been offset by gradually recovering orders from China.

China has replaced the United States as the biggest buyer of Thai products in the past few months.