Lackluster domestic consumption a severe problem

While the nation is riding on a tide of booming exports, domestic consumption has cooled off substantially, a problem caused by structural factors such as falling birth rates and the exodus of entrepreneurs, and complicated by the credit card storm, economists said yesterday.

Liang Kuo-yuan (梁國源), director of Polaris Research Institute (寶華經濟研究院), said that the nation's birth rate began to fall in 2000, coinciding with the time that Taiwanese businesspeople accelerated their move to foreign countries.

"A smaller population and the absence of a fair portion of rich consumers certainly contributed to the cool-off in domestic consumption," Liang said.

Last month, the government adjusted its full-year economic forecast from 4.31 percent to 4.28 percent, in part to reflect the slow growth in domestic consumption of 1.71 percent in the first half of the year -- the lowest in three years.

While domestic consumption floundered, the nation's trade surplus surged 10.5 percent year-on-year to US$1.21 billion last month. For the first eight months of the year, the trade surplus jumped 71.7 percent to US$10.77 billion from the same period last year, indicating booming exports.

According to Hu Sheng-cheng (胡勝正), chairman of the Council for Economic Planning and Development, as domestic consumption accounts for 60 percent of the nation's GDP, the council's expectations that domestic consumption could grow 3 percent for the first eight months have been dampened by the 1.71 percent result in the first half.

Hu admitted that the domestic market's performance was "far worse than imagined" owing in part to superstitions related to the "Ghost Month" -- a period when many people refrain from buying houses and cars or getting married.

When big-ticket item consumption is low, hopes usually shift to the stock market. However, the local bourse has remained sluggish as investors have adopted a wait-and-see attitude because of the political uncertainty caused by a mass sit-in calling for President Chen Shui-bian (陳水扁) to step down, Hu added.

Hu said that the government has prepared a "grand investment plan" to boost private-sector investment, which he said would help improve the job market and employee incomes, thereby boosting consumer confidence.

Liang, however, noted that the domestic market was cooling to a "severe" extent, citing figures which he said gave him no reason for optimism, such as the average growth rate of 6 percent in domestic consumption between 1991 and 2000, a figure that has since fallen to around 2 percent year-on-year.

He attributed the decline to structural factors that were compounded by the credit card and cash card storm that appeared in the fourth quarter of last year, forcing banks to cut consumer loans, leading to NT$40 billion in "restrained" consumer spending.

Liang referred to South Korea's experience to explain his doubt about a near-term recovery. It took South Korea two years to handle a similar crisis, he said, while Taiwan was just in the third quarter of its crisis, he said.

Besides, he continued, when South Korea was tackling its credit card debts, its housing and stock markets rose, as did its currency's value -- factors which are all missing in Taiwan. He forecast that the impact of card debts on the economy would continue as long as wages and salaries did not rise and other conditions did not improve.

"Probably more than a year from now, when the credit card storm is over, domestic consumption will grow 2 percent year-on-year, " above the current dismal 1.71 percent, he said.

As the government has not publicized details of its "grand investment plan," Liang said it is difficult for him to envision a day when the yearly growth of domestic consumption will return to 6 percent.