Consumer spending constitutes a crucial element of Taiwan’s economic activity, as it accounts for up to 60 percent of GDP. However, recent economic data suggested that consumers remain wary about economic prospects and are spending less and saving more.
On Thursday, the Taiwan Institute of Economic Research (TIER) revised its economic forecast for this year, predicting the nation’s GDP would contract 2.89 percent year-on-year, worse than its previous estimate of a 1.91 percent decline.
TIER’s forecast came after the Chung-Hua Institution for Economic Research (CIER) last month predicted a 3.72 percent decline for Taiwan’s economy this year, which was also a downward estimate from a forecast of a 3.56 percent drop issued in July. The Directorate-General of Budget, Accounting and Statistics (DGBAS) — which predicted in August that the economy would contract 4.04 percent this year — is expected to update its forecast on Nov. 26.
Both TIER and CIER listed feeble consumer spending as one of the reasons why the economy this year looked set to turn out weaker than they had previously expected. TIER predicted a 0.37 percent rise year-on-year in private consumption this year, while CIER anticipated 0.46 percent growth, following a decline of 0.3 percent last year. For next year, TIER forecast 1.89 percent growth and CIER expected an increase of 1.91 percent, but this growth outlook has more to do with this year’s low base than the true state of economic momentum.
Taiwan is facing persistent weakness in consumer spending. DGBAS data show consumer spending showed an average 3.14 percent annual increase from 2000 through last year, average growth of 10.37 percent from 1990 to 1999 and 13.45 percent from 1980 to 1989.
While shopping sprees seen at local department stores last week came as a welcome relief — consumers were spending money for their own reasons, unlike when the government handed out shopping vouchers to help stimulate the economy — they may change their behavior if the economy takes a turn for the worse and job prospects become worrisome.
That consumers have become more frugal in recent years is a result of rising unemployment and stagnant real wages. As the unemployment rate, which still hovered at around 6 percent in recent months, is not likely to show significant improvement in the short term, the continual weakness in consumer spending raises concerns about whether Taiwan’s economic recovery that started in the second quarter can be sustained without government support.
The government’s recent push for an economic cooperation framework agreement (ECFA) with China could bring a mixed bag of fortune to businesses and workers. The problem is that is if Taiwan were to engage with China while not making an effort to develop similar free-trade pacts with other countries, an ECFA would just make it easier for businesses to move to China. This would mean more unemployment at home and further weak consumer spending.
An economic recovery usually first sees domestic productivity rise and exports grow, with improvements in the labor market coming later. The challenge for the government now is to maintain a delicate balance of growth in these key areas to avert a double-dip recession or a W-shaped recovery in the months ahead.
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