There is a growing sense of unease about Taiwan’s economy this year after recent data showed a loss of momentum in the face of growing global headwinds. The Directorate-General of Budget, Accounting and Statistics (DGBAS) on Friday unexpectedly lowered its economic growth forecast for the year to 3.28 percent, citing weakening exports, private consumption and domestic investment.
The DGBAS estimated three months ago that the economy would grow 3.78 percent this year after expanding 3.77 percent last year, while most domestic think tanks last month raised their economic growth forecasts, assuming that cheaper fuel costs would offset a slowdown in exports. Therefore, it is difficult not to pay attention to the DGBAS’ downward adjustment, which could paint a very different view of the economy.
Earlier this year, there was general optimism that the economy would fare better than last year on the back of lower crude oil prices. However, such optimism started to wane this month after official data showed exports last month contracted by the largest annual pace in more than five years and export orders — which offer an indication of the nation’s products and components shipments to overseas markets over the next one to three months — also posted the first annual decline in 22 months.
Adding to worries about export performance, the DGBAS said export growth this year might be the worst since the global financial crisis in 2008 and 2009, shrinking 2.62 percent annually. In February, the DGBAS projected exports would increase by 1.02 percent this year.
The growth momentum of the global economy has been softer than predicted. However, there are two other factors that could drag down Taiwan’s export performance this year: Increased competition from China, which appears to be taking more orders away from Taiwanese manufacturers, and excess inventories in the semiconductor and electronics supply chains, meaning further downside risk to exports in the next few quarters.
What might be a more worrying sign is the slowing expansion in fixed capital formation, which is a crucial element of domestic demand, as the latest GDP data showed capital formation fell 1.29 percent year-on-year in the first quarter.
Capital goods imports, which are highly correlated with capital formation and an indicator of companies’ intentions for investment, also decreased by 9.4 percent year-on-year last quarter.
Deteriorating external demand is likely to hurt not just corporate investment, but also consumer purchases. Many Taiwanese might spend less this quarter after splashing out on travel and shopping during the Lunar New Year holiday last quarter. However, the cutback might extend in upcoming months in view of potentially limited increases in real wages and employment if investment interest from Taiwanese companies remains lackluster.
Some have said the central bank should focus on export competitiveness rather than inflation as exports start to lose steam, suggesting that an interest rate cut or New Taiwan dollar depreciation is likely back on the bank’s radar. As China’s economy is still slowing, the impact of the US Federal Reserve’s anticipated interest rate hike has yet to fully unfold and if the global economic outlook cannot turn up firmly from this quarter onward, Taiwan’s monetary and fiscal policies will need to be supportive, or economic growth this year is likely to fall below the government’s projection of 3.28 percent.
Policymakers need to be well prepared to avoid the economy falling prey to something unexpected.
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