Economy goes into recession

It's official. The nation's economy has now met the textbook definition of a recession: little or no growth for two or more consecutive quarters.

The government's official number-cruncher reported yesterday that the economy shrank by 2.35 percent in the second quarter.

The poor performance follows sluggish GDP growth of just 1.1 percent in the first quarter.

What's more, the Directorate General of Budget, Accounting and Statistics (DGBAS) now expects that the economy will contract by 0.37 percent for the full year -- a first for Taiwan's economy.

Earlier, DGBAS had forecast that GDP growth would be 4.02 percent for this year.

"It's the biggest drop since a 4.26 percent fall recorded in the first quarter of 1975 due to steep contractions in the island's exports, investment and production caused by a prolonged global slowdown," Lin Chuan (林全), DGBAS director-general, said of the second-quarter numbers.

"Taiwan has been hit the hardest because of its heavy reliance on exports of electronics and telecommunications products to the US market compared to Japan and South Korea. ... After the US economy took a plunge beginning in the second half of last year, there has been no sign of recovery."

Analysts were stunned by the second-quarter figures, with many anticipating a second-quarter decline of around 1 percent at worst.

"Taiwan's economy is deteriorating at a pace that is much worse than we had expected," said Capital Securities analyst Richard Tsai, who had estimated a decline of under 1 percent. "We can say that the country is now officially in recession."

Much of the slowdown can be attributed to falling demand for the nation's high-tech products in the US, Japan and Europe.

Exports, equal to about half of the nation's GDP, dropped 17 percent in the second quarter from a year ago, according to figures released earlier.

The Ministry of Finance expects exports to shrink 13 percent this year as an economic rebound in the US -- the biggest buyer of Taiwanese goods -- is taking longer than expected.

In addition, record unemployment and banks' rising bad loans mean domestic spending is too weak to keep growth on course.

Third-quarter GDP is expected to decline 2.45 percent, but the government forecasts fourth-quarter GDP will rebound and grow by 2.38 percent, Lin said.

A drawn-out recovery in the US and capital flight to China -- where wages are about one-tenth of Taiwan's levels -- are compounding the nation's problems.

That's hurting manufacturers. Taiwan Semiconductor Manufacturing Co (TSMC, 台積電), the world's biggest maker of made-to-order chips, said second-quarter earnings fell 98 percent as customers slashed orders, leaving over half the company's chipmaking machines idle. TSMC expects profit to drop 60 percent this year.

United Microelectronics Corp (聯電), TSMC's biggest rival, turned to a loss in the second quarter and fired 3 percent of its workforce as sales and prices slumped.

Siliconware Precision Industries Co (矽品精密), a chip packager, reported its first-ever loss and trimmed staff by 5 percent by leaving positions vacant when workers left.

Unemployment is climbing as Taiwan companies shed workers and move factories to China to save money. The jobless rate rose to 4.6 percent in June, the highest since the government began compiling figures in 1978.