Although the public already held a conservative view on the nation’s economic growth in the second quarter, given a slew of disappointing economic data in recent weeks, GDP growth of less than 1 percent for the past quarter estimated by the Directorate-General of Budget, Accounting and Statistics (DGBAS) on Friday still caught many people by surprise, including government officials.
In the April-to-June quarter, the nation’s economy grew only 0.64 percent from a year ago, a sharp slowdown from 3.37 percent in the previous quarter. While the economy avoided an outright contraction last quarter, despite some doomsayers’ predictions, the official figure released on Friday was the lowest in the past 12 quarters and much lower than the DGBAS’ 3.05 percent growth forecast made in May.
It is difficult to say how strong the economy will be in the second half of the year, despite expectations that the Chinese economy will moderate this year, the risk of a potential Greek exit from the eurozone is subsiding and the electronics sector is set to enter its peak season in the coming months. After GDP expanded 2.005 percent in the first half from a year earlier, the latest data imply that it will be difficult for Taiwan to maintain economic growth of 3 percent this year as the government desires.
In such circumstances, what should the government do to boost external trade and revitalize the economy? A more serious concern is whether the second-quarter slowdown was temporary because of the adverse impact of macroeconomic volatility, or if the poor showing last quarter was the result of long-term structural weaknesses within the economy.
The government seemed to know the answer. Earlier last week, the Executive Yuan approved a plan presented by the National Development Council aimed at expanding exports and promoting investment in the short term, as well as transforming the nation’s economic structure in the long term.
Indeed, some measures of the Cabinet’s new economic stimulus plan to increase investment in public infrastructure projects, such as waste-water processing and green energy development, appear to be a part of the major fiscal expansion Taiwan needs.
Such expansionary fiscal policy suggests that the government would finance public projects and cut taxes to boost domestic investment. However, the scope of debt-raising and tax reduction might be limited and the effect on the economy is likely to be capped, because government debt is already close to the statutory ceiling of 40 percent of GDP.
Admittedly, protracted weakness in external trade and rising competition in the electronics sector could negatively impact the domestic economy by depressing investment, employment and wage growth. Therefore, the government can become more expansionary in monetary policy to make room for an early recovery in the economy.
The central bank in particular might want to maintain low interest rates to ensure businesses have low borrowing costs and mortgage holders feel less of a burden to spend. The bank might also have the intention to allow the New Taiwan dollar to follow the depreciation in other Asian currencies given their close linkages in trade and foreign exchange policies. Actually, the NT dollar already depreciated 0.48 percent last week and 1.96 percent last month against the greenback, dragged down by weak sentiment on Taiwan’s growth outlook, as well as the larger depreciation of the Korean won in the month.
The short-term recovery outlook is hardly reassuring and the economy does need more stimuli as it faces rising risks from slumping exports amid weaker demand from major overseas markets including China, Europe and Japan. The government, which has repeatedly presented economic stimulus packages, has a big stake in how its latest stimulus plan is put to work or it risks further damage to its credibility and accountability.
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