With the global economic growth expected to decelerate next year, domestic demand will become a key factor in driving Taiwan's economic performance in the coming year, economists and market watchers said.
Domestic demand that includes both domestic investment and consumption is expected to climb from a growth of 1.11 percent this year to 2.67 percent next year, the Polaris Research Institute (寶華經濟研究院) predicted last week.
Flagging domestic demand will pick up next year as the better-performing stock market will give a big push to private consumption, institute president Liang Kuo-yuan (梁國源) said on Friday.
HOT AND COLD
"It has been an `external hot, internal cold' situation this year" -- a phrase used to refer to strong export performance but weak domestic demand, Liang said at a forum held by National Chengchi University's department of money and banking.
"To achieve a 4.2 percent GDP growth next year as forecast by some institutions, Taiwan's internal and external environments must both perform at least `warmly,'" he said.
Australian equity research house Macquarie Securities predicted last week that the TAIEX could rally to 10,000 points by the end of next year. The TAIEX closed up 0.41 percent to 7,652.47 on Friday.
Liang said that stabilizing corporate profits would also help strengthen private investments. The institute did not offer a growth estimate of domestic investment.
The Academia Sinica predicted on Friday that private investments are expected to increase 3.18 percent next year from 1.81 percent for this year, as a result of easing bad consumer loan problems.
Domestic consumption is expected to grow 3.27 percent next year, up from the growth rate of 1.49 percent this year, the nation's top research institute said.
That is compared to 3 percent last year and 3.9 percent in 2004, according to Polaris Research's statistics.
The pace of domestic demand is likely to expand stably to contribute to the nation's export-driven economy which the Directorate General of Budget, Accounting & Statistics (DGBAS) forecast would grow 4.14 percent next year.
Academia Sinica forecast the economy would grow 4.21 percent next year, while the Taiwan Institute of Economic Research (TIER,
But inflationary pressure could be the most uncertain factor, Cheng Cheng-mount (鄭貞茂), chief economist and vice president of Citibank Taiwan Ltd, said at the forum.
Cheng said the limited oil supplies and rising exploitation costs could still create downside risks on commodity price fluctuations in the long term.
The consumer price index (CPI) growth has stayed low and steady this year thanks to relatively stable oil prices and fewer typhoons to ravage agricultural produce. Analysts have predicted that crude oil prices will drop from this year's average US$68 per barrel to US$65 next year.
The central bank said the CPI only edged up by 0.59 percent year-on-year for the first 11 months of the year. The core CPI, excluding prices of vegetables, fruits, fishery products and energy, only grew by 0.52 percent during the same period, the bank said in a report on Friday which is to be delivered to legislature today.
The whole-year CPI growth is expected to be lower than DGBAS' forecast of 0.68 percent, the bank said in the report.
The central bank is expected to meet on Thursday.
Cheng said he expected the central bank to pause its consecutive rate hikes this week as inflationary pressure eases.
The bank has ratcheted up its benchmark interest rate for nine straight quarters since October 2004 to 2.625 percent.
Lehman Brothers in a report released last week also predicted that the central bank was likely to keep rates on hold given "weak domestic demand and the risk of a sharp downturn in exports."
As CPI inflation is close to zero, this implies the real interest rate should be approaching its neutral level and likely allows the central bank to maintain its monetary policy, the research house's chief economist Rob Subbaraman wrote in the report.
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