Editorial: Recession or mere statistics?

Had it not been for a poor showing in the Council for Economic Planning and Development's latest business indicators report, few would be aware that the economy is moving into recession territory.

And had it not been for a suggestion by central bank Governor Perng Fai-nan (彭淮南) last week that the government should consider scrapping these indicators, most of us would not know they had been in use for more than three decades.

Nevertheless, we will find out how the government is going to deal with this thorny issue this week after Vice Premier Tsai Ing-wen (蔡英文) said last week that the government needed a better economic predictive tool to analyze the nation's economic health and instructed the relevant agencies to come up with a solution as soon as possible.

It all started when the council latest report indicated that the economy had slowed down last December. In the report, the council said the index of leading indicators -- designed to forecast economic activity three months ahead -- had dropped 1.1 percent to 107.8 points in December from the previous month, while the index of coincident indicators -- which measure the current pace of economic activity -- fell 0.4 percent month-on-month to 109.1 points.

What raised eyebrows, however, was the total score of the council's indicators, which declined five points to 16 points in December and flashed a "blue light" on the council's spectrum, indicating a recession, after six consecutive "yellow-blue" lights indicating a slowdown.

The unexpected recession warning came among predictions that the economy would experience a soft landing this year following forecasts of a slowdown in the US economy. It prompted public concerns, because the "blue light" was last seen during the SARS outbreak.

Nobody knows whether the "blue light" indicator for December is a temporary phenomenon, as suggested by the council. A recession is defined as two consecutive quarters of negative growth and the council blamed December's figures on a comparison with a "blip" of a positive growth that occurred a year earlier.

But Perng's suggestion that the nation ditch the monitoring indicators in order to avoid a distorted view of its economic health did raise questions about the accuracy of the indicators -- the method by which economic variables are analyzed may not be accurate enough to justify changes of "light" shown in the council's five-level spectrum system.

Launched in 1968 by the council to gauge domestic economic health, the components of the indicators have gone through several changes, with the aim of better predicting economic fluctuations. The five-level spectrum, for its part, serves as a convenient way to evaluate economic trends, with a "blue light" indicating a recession, a "yellow-blue light" a slowdown, a "green light" steady growth, a "yellow-red light" slight overheating and a "red light" full-blown overheating.

These indicators have lost much of their utility for predicting future economic trends because some of the components lack a correlation with the nation's economic development. The components focus mainly on manufacturing and export-oriented variables, while in fact the service sector and domestic demand now account for 73 percent of the GDP.

This does not mean that the council's indicators should be scrapped, however. Instead, they should be modified -- adding new variables and removing old ones -- so that they better reflect the health of the economy and better help forecast future trends. Most importantly, the government needs to return to basics in order to improve its performance on the economy, rather than concentrate too much on indicators.