On Thursday last week, the central bank cut its rediscount rate by 12.5 basis points — 0.125 percent — from 1.5 percent to 1.375 percent, which is the second-lowest rate in the bank’s history. Over the past year, the bank has cut its interest rates by an average of 0.125 percent every three months.
If it goes on cutting rates at this speed, in three month’s time the bank’s interest-rate defense line would retreat to its historic low, which it saw during the 2008 to 2009 global financial crisis.
By looking at a few economic figures, people can see how much pressure the bank is under to invigorate the economy by cutting its interest rates.
Early last month, the Ministry of Finance published export figures showing negative growth for the 16th month in a row. A few days ago, Academia Sinica’s Institute of Economics cut its GDP growth forecast for this year to 0.52 percent, putting the target of 1 percent growth hopelessly out of reach. On Thursday last week, the Taiwan Institute of Economic Research published its manufacturing business indicators for May, registering a blue light, which indicates a contraction, for a record-breaking 14th month in a row.
Given the sluggish manufacturing and export figures that have shown no sign of recovery for more than a year, along with repeated cuts to GDP growth forecasts and the global economic confusion following British voters’ decision to leave the EU, central bank Governor Perng Fai-nan (彭淮南) said that to break out of its economic difficulties, besides monetary policy, the nation also needs expansionary fiscal policies and structural reforms to attain sustained economic growth.
Perng made similar remarks when addressing the Legislative Yuan’s Finance Committee in March, when he said he hoped the then-incoming government would be able to revive the economy through fiscal expansion and policies to speed up regional economic integration.
More than a month has passed since President Tsai Ing-wen’s (蔡英文) administration took office, and it clearly has not heard Perng’s call, so after cutting interest rates last week, Perng had to repeat what he said in March.
It is unfortunately foreseeable that in three months’ time, as well as announcing another cut in interest rates, Perng would have to call for the same thing once again, asking the government to consider launching fiscal policies that could revive the economy.
The Tsai administration’s policies are clearly out of tune with what Perng is calling for. Perng wants the government to launch fiscal policies aimed at stimulating the economy and reviving economic growth.
However, in a speech that Premier Lin Chuan (林全) made to the Third Wednesday Club — a forum for business leaders — in the middle of last month, he said that the government’s main focus was unemployment and wage figures rather than economic growth.
Since Tsai’s government took office, its economic policies have focused on adjusting income distribution, which has little to do with the economic growth rate in the short term. For example, the government has been promoting pension reforms and in recent labor disputes it has been showing greater concern for workers’ interests than the preceding government did.
Many economists recognize that if governments make appropriate adjustments on income distribution to reduce the gap between rich and poor people, this can increase consumption by low and middle-income earners, which would help economic growth in the long term. That being so, the government’s policies that focus on income distribution should be able to form a sound basis for long-term economic development, but that leaves the question of what is to be done about the poor economic climate.
It seems that Tsai’s government does not care about the poor state of the economy. This might be because although unemployment was a little high in February at 3.95 percent, it fell for three months in a row in March, April and May, sinking to 3.84 percent, which is in the low ranges of the past 10 years.
Lin was a finance professor and has served as finance minister; as long as the unemployment rate does not rise significantly, he is unlikely to break with financial discipline and adopt financial stimulus policies that would pass from parents to children and grandchildren.
Unless unemployment gets much worse, the Tsai administration’s attitude of not caring about the cold economy is likely to persist until the 2018 local elections.
If the government does not propose stimulatory financial policies, such as major public construction projects, before the elections, local officials from Tsai’s Democratic Progressive Party are likely to come out in protest.
However, Perng is not unjustified in calling for other measures. If the cold economy goes on for a long time, businesspeople would see poor prospects for their profits and would gradually invest less. This would likely cause a vicious cycle that leads to a shrinking economy and even to deflation.
The government should not allow the cold economy to get so bad that it becomes a shrinking economy. That is what Perng is worried about, and it would be a good thing if the Tsai administration started worrying about it as well.
Guo Yung-hsing is a professor at National Taichung University of Science and Technology’s department of international trade.
Translated by Julian Clegg
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