The recent rebound in the local equity market and the narrower decline in export orders have had some people wondering whether this is the beginning of economic recovery or just a sign that the economy has stopped getting worse.
Last week, government data showed that the decline in export orders decelerated last month to 22.7 percent year-on-year from a record drop of 41.67 percent in January.
M1B, a money supply gauge that includes currency held by the public and deposit money, showed that last month’s growth accelerated to 2.71 percent year-on-year from a rise of 1.79 percent in the previous month, meaning that a substantial amount of capital was moved into the equity market and there was a sustained flow of money from time deposit to demand deposit accounts.
In the local equity market, the benchmark TAIEX index has risen 18.3 percent this month and 26.9 percent since the Lunar New Year holiday, with investors hoping that the nation’s economy is stabilizing and cross-strait relationships are improving.
No wonder some people have linked the central bank’s decision on Thursday to hold its benchmark interest rates unchanged to speculation that the economy has hit bottom, but the bank’s latest move reflected its realization of the limited effectiveness of its rate cuts in boosting the economy.
Now for a reality check: The narrower decline in export orders last month was mainly supported by rush orders from global vendors. These kinds of last-minute orders do not indicate that manufacturers are now rolling up their sleeves in preparation for the end of the global economic recession.
Instead, they represent an extraordinary operational response to current economic uncertainties in which companies deplete their existing inventories and only place orders when absolutely necessary. In doing so, companies can keep operating cost as low as possible and avoid the risk of inventory write-downs.
As rush orders do not lead to sustainability and profitability, we should be cautious about this newly found optimism in response to them. They represent neither a true increase in end-market demand nor a boost in consumer spending. If global unemployment persists or even deteriorates, consumer purchasing power will continue to weaken.
Moreover, news that several high-tech companies plan to stop asking their employees to take unpaid leave only indicates these companies are responding to the recent uptick in market demand. More evidence is needed before an assessment can be made on whether the economy is stabilizing.
Some have also viewed this equity rebound as a sign that the economy is bottoming out, but there’s little reason to be optimistic about the world economy if the origin of the global recession — the US, and its financial sector in particular – do not straighten themselves out.
Unless Washington’s plans to remove toxic debt from financial companies or expectations that authorities can help failing US banks see some real, solid progress, fears of further volatility on Wall Street will remain and with it the spillover effect on the local bourse.
Regardless of what has happened with the stock market lately, it is too early to say that we have seen the end of the bear market. If the central bank’s rate cuts were to come to an end as some economists have suggested, it would be a mistake to think the economy was bottoming. Rather, it would show that policymakers were considering other options to boost the economy because the nation’s interbank rates and deposit rates were already at their historical low and would have limited effectiveness if they went much lower.
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