The New Year’s Eve fireworks display at Taipei 101 was a sight to behold. It is a pity, then, that saying goodbye to 2012 was not the same as bidding farewell to the economic stagnation that characterized much of that year.
If things do not change, it is possible that the new year will bring with it a double-dip recession, although it is too early to say what exactly will characterize the year ahead.
First, the global economic outlook is far from rosy. The austerity drive throughout the EU means that economic recovery is unlikely in Europe. The IMF predicts that six of the eight countries whose economies are most likely to contract this year are in Europe.
The US has managed to step back from its “fiscal cliff” for the time being, but in two short months steep automatic cuts to US federal government spending are expected to kick in and there is uncertainty as to what the US Congress will do about this.
Even though it is anticipated that the US debt ceiling will be raised, there remains a risk that the country will have its credit rating downgraded a second time. This would mean an increase in taxes, which would be a drag on economic recovery there.
Nevertheless, that the US owns a considerable percentage of the world’s oil shale reserves means it can rely on a relatively inexpensive energy resource and as long as the US’ financial system stabilizes, then it should remain competitive over the long term.
In the BRIC countries (Brazil, Russia, India and China), we see that China’s industrial structure continues to adjust and after its recent transfer of political power, the country’s new leadership is looking for stability and hoping for sustained, steady economic growth.
Russia is staring at a possible financial crisis ahead, one from which it will be difficult to extract itself.
India’s economic and trade policy has gone awry, and economic growth has slumped with some predicting that India’s economic growth will be eclipsed by Indonesia’s forecast 6 percent growth in GDP.
Brazil is facing increases in workers’ wages and the cost of labor, as well as the growing pains of economic restructuring.
Economic growth will be the preserve of small African countries, but as average incomes are so low there, the impact of this growth is unlikely to be felt internationally.
Both the US and Japan are printing more money as part of quantitative easing monetary policies, which will have an effect on international financial markets due to the subsequent devaluation of the currencies of these two major countries. This will not only have repercussions on international trade, it could also lead to destabilizing of international speculative hot money flows.
In the long term, global inflationary pressure is set to increase, and the status of the US dollar will weaken and perhaps even collapse as the de facto international currency. After the international financial markets have adjusted to this tectonic economic shift, the world will look somewhat different.
As far as Taiwan’s economy is concerned, this year will see increases in oil and electricity prices, the implementation of a capital gains tax on securities transactions, the second-generation National Health Insurance reform, pension reform and higher charges, all of which will add to the financial burdens borne by the nation’s households, thereby suppressing effective demand. Rising government debt and liabilities are further concerns.
The most unfortunate issue is the unfair distribution of income, with 1.86 million people on low incomes being forced to eat into their savings to supplement their earnings. Once these savings are used up, the issue of the marked wealth disparity in the country will become more serious.
In this year’s budget there was no mention of any economic stimulus expenditure plans, so the nation’s problems are only going to get worse.
At present there is a large amount of speculative money flowing into Taiwan, putting considerable pressure on the New Taiwan dollar to appreciate and causing an abrupt, yet short-term, increase in the TAIEX.
When this hot money flows out again, the stock market and foreign currency exchange markets — commodities and futures — will be hit twice: High-performing stocks will be bought and sold speculatively, and the financial markets in Taiwan are expected to fluctuate wildly.
In addition, an appreciation in the exchange value of the NT dollar will result in a decline in export volume.
Last year, import volume fell more than expected, leaving the country with a minor trade surplus, but it is unlikely that it will continue to fall this coming year. This could lead to a trade deficit, and if this occurs, Taiwan’s export-driven economy will lose momentum and the likelihood of further economic decline will increase.
In the two quarters from June last year to the present, the South Korean won has appreciated at a higher rate than the NT dollar, giving a boost to the competitiveness of Taiwan’s high-tech exports.
In addition, several local manufacturers have partnered with Japanese high-tech companies, so there are a number of new business opportunities in the offing.
However, China has embarked on a policy of import substitution, and this will further force Taiwanese manufacturers to relocate to China, resulting in falling Taiwanese export volumes.
The agreed implementation of the cross-strait currency clearing mechanism for transactions in NT dollars and the Chinese yuan will push forward cross-strait financial consolidation, expediting the formation of an NT dollar/Chinese yuan dual-currency market in Taiwan. This will promote the internationalization of the yuan, making Taiwan an offshore cross-strait trade hub for the yuan, bringing more business opportunities in terms of cross-strait finance and trade.
Last year, the US’ economic growth rate stuck at around the 2 percent mark and the EU remained bogged down in its economic mire.
The forecasts for the global economy in the coming year offer little optimism.
The Directorate-General of Budget, Accounting and Statistics had to adjust the predicted economic growth rate for last year downward on no less than nine occasions, from an initial guaranteed 4 percent, to a guaranteed 3 percent, down to barely 1 percent.
For the coming year, the forecast is 3.15 percent, with different institutions predicting anything from 3.8 percent to 3.05 percent. Not only is this lower than the past year’s base period, but many people feel this figure is overly optimistic.
Unless there is a conspicuous improvement in the international economic climate and in the absence of any proactive domestic policies, the expectation is that the nation’s economy will continue to suffer in the coming 12 months.
Norman Yin is a professor of financial studies at National Chengchi University.
Translated by Paul Cooper