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EDITORIAL: A year of checks and balances

It's almost time to welcome the new year. But before we do that, we should take a moment to appreciate the resilience shown by the economy in the year that is about to pass.

The local markets shrugged off internal and external pressures like political bickering, high energy prices and ongoing jitters in global financial markets as a result of the US subprime mortgage problem.

The economy grew 5.46 percent year-on-year compared with an increase of 4.89 percent the year before, while total trade volume is likely to hit a record high of US$450 billion this year.

Despite volatile food and energy prices, the consumer price index is estimated to increase by just 1.65 percent from last year and the unemployment rate is predicted to hold steady at 3.9 percent -- both more or less in keeping with government targets.

Banking reform has progressed at a slow but steady pace, after authorities prioritized probes of insider-trading allegations and took over six problem lenders rather than championing consolidation.

There were also great strides in the biotechnology and pharmaceutical industries following the passage of key legislation in June.

And, the following month, the IT and communications industries welcomed the auction of six licenses to develop faster wireless Internet services.

Despite all this progress, the slowing of the US economy, rising raw material and fuel prices and high borrowing costs -- as a result of the central bank's efforts to cap inflation -- will pose significant challenges next year.

Global Insight forecasts that US economic growth will slow to 1.9 percent next year as a result of the credit crunch, while the US Energy Information Administration predicts that global crude oil prices could climb to an average of US$79.72 per barrel.

Here at home, the central bank may raise interest rates again in the first quarter of next year, however moderately, after 14 such quarterly increases since October 2004.

The central bank's recent downward adjustment of its M2 money supply growth target to between 3 percent and 7 percent next year, from an annual growth target of between 3.5 percent and 7.5 percent for this year, was in keeping with the bank's forecast of a more moderate economic expansion next year.

Despite the economic headwinds, it is political uncertainty that has weighed most heavily on investors. For example, the proposed referendums on Taiwan's entry into the UN have investors worried about the possible implications such polls could have for the nation's relationship with China.

The public has had good reason to be skeptical, because politicians are notorious for putting their own agendas ahead of the well-being of the economy.

Last week, government officials trumpeted their efforts to boost domestic investment and consumption and lure overseas Taiwanese companies to list on the nation's stock markets.

But investors would have absorbed these statements with more than just a grain of salt. The government, no matter which leader it heeds, does not necessarily hold the key to economic prosperity.

All told, the year was one of significant changes for the economy and we cannot expect the markets to carry all of their momentum into next year unless investor sentiment improves. That would require positive financial market conditions worldwide, stronger-than-expected global economic growth, a stable domestic political environment and much improved cross-strait relations.
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