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Academia Sinica raises its GDP growth forecast

Encouraged by robust exports in the third quarter, Academia Sinica yesterday revised its GDP growth forecast for this year to 5.15 percent, up from an estimate of 4.46 percent in June.

It also, for the first time, projected that next year's GDP growth will slow to 4.31 percent.

Both forecasts are lower than those of the Directorate-General of Budget, Accounting and Statistics' recent estimates of 5.46 percent for this year and 4.53 percent for next year.

"Domestic demand is expected to hold steady, while exports will be somewhat affected by the subprime slowdown and remain flat next year," said Wu Chung-shu (吳中書), a research fellow at Academia Sinica.

Wu was fairly optimistic that the US subprime mortgage crisis would be addressed after major central banks stepped in on Wednesday to pump liquidity into the market in the form of bail-out funds and interest-rate cuts. He also said the US financial market's recent setback -- so-called "demand shock" -- was a "healthy" check after the booms experienced in past years.

"The US should be able to weather the subprime-triggered liquidity crisis... although a recovery isn't likely before the second quarter next year," Wu said.

Although the price of crude oil has soared recently, Wu said the key US$100 per barrel barrier was unlikely to be breached.

Although a recovery from "combined supply and demand shocks" will take time, Wu said contributions from emerging countries and rosy corporate earnings meant that better times lay ahead.

He said the subprime crisis would have a limited impact in Taiwan, with losses estimated at NT$2.3 billion.

However, Wu said there had been warning signs -- such as business investments in equipment contracting by 18.6 percent year-on-year last month.

"Private investment is unlikely to rebound before the third quarter of next year," the economist said, predicting annual growth would be 1.13 percent for this year, climbing to 5.84 percent next year.

Wu said it was significant that core inflation (excluding food, fish and energy) had increased by more than 1 percent year-on-year for five consecutive months. This suggested that inflation would be difficult to tackle, he said. Academia Sinica estimates that the consumer price index will increase by 1.84 percent this year and by 1.93 percent next year.

Wu said it was a cause for concern that economic confidence was declining despite better-than-expected economic fundamentals, adding that he hoped the political situation would improve.

He said he thought the central bank would stick to its guns, ignore the US Federal Reserve Bank's interest rate cut and maintain its course of gradually increasing interest rates at its board meeting on Thursday. Wu said local interest rates and liquidity were still at a relatively low level.

Market watchers have predicted that the central bank will raise its benchmark interest rate by 0.125 percentage points.
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