From excess savings and a lack of demand for government-led investment, shades of Larry Summers’ secular stagnation thesis are evident in Taiwan.
The problem is, fiscal and monetary policymakers cannot agree on what to do about it.
After cutting rates for the fourth consecutive meeting, the central bank on Thursday last week warned that monetary policy was shouldering too much of the burden for reviving growth.
Reductions in government spending could result in “serious consequences” for the struggling economy, the central bank said.
However, that is exactly what the administration of President Tsai Ing-wen (蔡英文) has in store.
It plans to cap debt growth and promises a balanced budget, including an overhaul of generous civil-servant pensions.
The policy puzzle threatens to cloud the response to three consecutive quarters of economic contraction as the export-dependent economy is battered by slower iPhone sales and anemic prices for petrochemical exports.
Group tourism from China is also down as Beijing has adjusted its policies.
The central bank, led by Governor Perng Fai-nan (彭淮南) since 1998, on Tuesday nudged its overnight guiding rate — seen by some as indicative of policy direction — down 0.1 basis point. That helped drive government 10-year bond yields to another record low.
Six of 15 economists surveyed by Bloomberg expect the main rate to be cut further by September.
However, the central bank does not want to do all the work.
The combination of a long-standing need for a structural upgrade and slowing global growth and trade could spell meager expansion for Taiwan in the long term, it said last week.
In contrast to the administration’s plans, the central bank recommended the government have the power to raise the debt limit “as needed.”
Officially forecast to grow 1.06 percent this year, Taiwan might post less than half that rate of growth if a state-funded research institution proves accurate.
“If the economy doesn’t turn around in the second half, the burden of boosting growth should fall on fiscal policy,” DBS Group Holdings economist Ma Tie-ying (馬鐵英) said in Singapore.
However, prospects for such an approach seem far off.
Premier Lin Chuan (林全) last month said that the government’s budget for the coming fiscal year was “stretched to the limit.”
Budget increases were to be avoided, he said.
In an interview on Tuesday, Deputy Minister of Finance Su Jain-rong (蘇建榮) said that increased government spending might not help much if conditions deteriorate.
While recognizing that monetary policy has limitations, “fiscal policy has its limits too,” Su said.
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