If the stock market reflects confidence in the nation’s economy, then the plunge of 284.86 points, or 3.96 percent, in the benchmark TAIEX last week indicates that investors remain uneasy over former president Chen Shui-bian’s (陳水扁) money-laundering probe and over continuing fallout from the global credit crisis.
But investors have another reason to be concerned after the Directorate General of Budget, Accounting and Statistics (DGBAS) on Friday revised downward its economic growth forecast for this year to 4.3 percent from May’s estimate of 4.78 percent, signaling that the economy is facing strengthening headwinds.
With weakening domestic demand and falling exports, the statistics bureau said the economy grew in the second quarter by 4.32 percent year-on-year, the slowest in five quarters, after an annual increase of 6.25 percent in the first quarter. For the second half of the year, growth is expected to further slow to 3.04 percent for the third quarter, the weakest since the first quarter of 2005, before seeing growth of 3.75 percent in the fourth quarter.
The latest forecast did not surprise the market, confirming concerns that further economic slowdown is unavoidable amid a worsening global economy.
Exports form the backbone of Taiwan’s economy. For the second half they are forecast to grow only 6.29 percent year-on-year, after an annual increase of 18.08 percent in the first half. So there appears to be no reason for investors to be optimistic about the remainder of the year. The question then becomes how long this economic slowdown will last.
Growth in domestic investment and private consumption could play a central role in supporting the economy. The problem is whether growth momentum is strong enough to offset weakening exports.
Not likely. Companies in Taiwan have recently become more conservative with their investment plans. Recent polls among local firms show that many have attempted to maintain a slim workforce and avoid hiking salaries to see through this difficult situation.
Under these circumstances, growth in household income is likely to stagnate, while inflation will continue to erode purchasing power, further dampening private consumption. According to the DGBAS forecast, private consumption this year will grow 1.38 percent year-on-year, compared with 2.55 percent growth last year.
The latest retail sales data released by the Ministry of Economic Affairs on Friday depicted exactly this picture of fading private purchasing power, with total revenues earned by local companies in the retail sector dropping 3.81 percent to NT$276.1 billion (US$8.8 billion) last month from a year earlier, the largest annual decline since 2002.
Without a doubt, the US slowdown has spilled over to major economies such as Europe and Japan, compounding the effect on Taiwanese exports. While President Ma Ying-jeou’s (馬英九) government seems optimistic about the contribution of future Chinese tourists to the economy, its recovery could be delayed if unfavorable external demand and inflationary pressure persist.
Investors are looking for more clues on the economic outlook; for now these GDP figures will likely continue to depress sentiment in the stock market. The release of more data next week, including export orders and the index of leading indicators for July, will indicate whether the economy will decelerate sharply as year’s end approaches.
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