Wed, Jun 05, 2013 - Page 8 News List

Confident consumers remain key to economy

By Kuo Chen-hero 郭振鶴

Due to Taiwan’s largest-ever one-time downward adjustment in economic growth, projected growth will not reach more than 3 percent this year.

The steep devaluation of the Japanese yen has put a lot of pressure on Taiwanese exports, which declined in April, and the nation’s attempts to maintain low interest rates to promote domestic investment have only encouraged more investment in the real-estate market.

This is increasing the temptation to engage in property speculation, which, in turn, drives housing prices up. That will then have a negative impact on the government’s attempt to target such speculation and do little to spur economic growth.

Exports and investment are two factors that influence economic growth, but the real problem facing the economy is weak consumer confidence.

Last year, consumer spending made up 53.61 percent of GDP, while investment made up 16.02 percent, which means that private spending is more than three times as much as than investment as part of GDP.

Looking at the Directorate-General of Budget, Accounting and Statistics’ forecast for the year, private consumption is projected to grow by just 1.46 percent, 0.01 percentage points less than last year’s 1.47 percent and 0.4 percentage points less than in February.

The agency has also predicted that investment will grow by 5.17 percent this year, a stellar performance compared with last year’s decline of 4.19 percent.

Nevertheless, the agency still projects that growth will fall short of the government’s 3 percent target, reaching just 2.4 percent. If the impact of exports is excluded, private consumption is a major factor in domestic economic growth: The higher it is, the likelier it is to boost the economy.

The main reason private consumption remains low is weak consumer confidence. The average real salary declined by 1.64 percentage points from January to March compared with the same period last year, extending a decline that has been occuring since 2010. Between 2011 and last year, disposable income increased by less than 1 percent.

This is a huge difference compared with the period before the financial crisis between 2002 and 2006 when disposable incomes increased by 6 percent.

Small wonder, then, that the public does not feel very motivated to start consuming.

The reason some people have no money left to save is that their disposable income is too low. Together with the lack of hope for a salary increase in the future, this low income results in a low marginal propensity to consume — people are afraid of spending their money.

The current administration has been in power for five years. It must act quickly to meet the public’s expectations, adjust its current economic strategies and solve the lack of effective economic growth. The government should work toward increasing private spending rather than just pushing for growth in domestic investment.

If it is unable to stimulate private spending, the nation’s GDP will only grow slowly, or could even come to a standstill. If this goes on, Taiwan risks entering a vicious circle that will result in a worsening outlook for its economy.

Kuo Chen-hero is an assistant professor of economics at Soochow University.

Translated by Perry Svensson

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