Deflation continuing to menace nation's economy

HARD TIMES AHEAD: Deutsche Bank expects Taiwan's economic growth to follow the US down next year, decelerating to 3.5 percent from 4.2 percent this year

By Amber Chung  /  STAFF REPORTER

Thu, Aug 03, 2006 - Page 11

Deutsche Bank warned yesterday of looming deflation in Taiwan amid a global economic slowdown, which would in turn lead to an end of interest rate hikes after one more increase this quarter.

"Deflation is a more pressing threat than inflation to Taiwan and some other Asian countries like Singapore," Michael Spencer, Deutsche Bank's chief economist and head of global markets research in Asia, told a media briefing in Taipei yesterday.

Taiwan's falling terms of trade has generated the deflation -- which in turn is the result of declining export prices and tighter margins, Spencer said.

Consumption and investment have weakened for the past few quarters and could also contribute to the deflationary risk, he said.

The core consumer price index (CPI), an inflation indicator that excludes food and energy prices, may reach no higher than 1 percent this year and close to zero percent next year, Spencer forecast.

For the first half of this year, Taiwan saw a headline CPI of 1.43 percent and a core CPI of 0.58 percent, according to government data.

Against this backdrop, the nation's central bank is expected to follow the lead of its US counterpart and cease raising interest rates after one more hike of 12.5 base points next month, Spencer said, and added that the bank could start cutting rates in the second quarter of next year.

The economist said the US Federal Reserve (Fed) would pause after lifting the Federal fund rate to 5.5 percent at a board meeting slated for next week, putting an end to the current cycle of tightening started in June 2004.

The Fed would then lower interest rates twice by 25 base points in May and June next year respectively as the US economy further softens.

US demand

Deutsche Bank forecast that US economic growth would slow to 2.3 percent next year, down from 3.1 percent this year, which would in turn drag down Asian economies that heavily depend on US demand.

The bank expected Taiwan's economic growth to correspondingly decelerate to 3.5 percent next year from 4.2 percent this year.

Spencer predicted that oil prices -- which have skyrocketed this year on tighter supply and increasing demand -- would moderate in the fourth quarter of next year with the average price of a barrel falling to US$55. Oil is currently retailing at around US$69 per barrel.

The global economy would not climb out of the down cycle until 2008, Spencer said.

On the currency front, the NT dollar is expected to mildly appreciate in the next 12 months, boosted by a strengthening Japanese yen and the yuan, the bank said.

Deutsche Bank forecast the NT dollar would rise to NT$32 against the greenback by year's end and hit NT$31.5 midway through next year. Meanwhile, the Japanese and Chinese currencies would jump to ?96 and 7.75 yuan respectively the bank said.