The economy finally expanded on a yearly basis in the second quarter, signaling that the worst of the nation’s economic slump might be over. The 0.69 percent growth rate in the April-to-June period was better than the 0.48 percent increase the Directorate-General of Budget, Accounting and Statistics (DGBAS) predicted in May. The positive growth also followed three consecutive quarters of annual contraction as momentum in private consumption was sustained and exports returned to growth.
The preliminary second-quarter GDP figure released by the DGBAS on Friday might have been affected by short-term factors, including restocking demand for semiconductors and electronics by global tech firms, as well as pent-up demand in the petrochemical sector amid recent stabilization in global commodity prices. The restocking activities could be temporary and Taiwan still faces the potential risk of weakness in end demand for the rest of the year.
Even so, DGBAS officials said it was likely that the GDP growth rate would exceed 1 percent for the full year, if the economy is to expand in line with the agency’s previous estimates of 1.97 percent in the third quarter and 2.37 percent in the fourth quarter. In contrast, several local and foreign economic institutes still hold rather downbeat expectations of less than 1 percent GDP growth for this year.
Taiwan has been hit by a slump in exports to China and other major markets, as well as falling oil prices and manufacturing output that forced the government to revise downward its GDP growth forecasts several times. Adding to the problem is slower expansion in domestic demand, which had been the main source of growth for the economy in previous years.
According to the DGBAS’ latest tallies, domestic demand contributed 0.1 percentage points to second-quarter GDP growth, down sharply from 1.4 percentage points in the first quarter, with private consumption growth up just 1.05 percent year-on-year in the second quarter, but gross capital formation was down by 3.11 percent over the same period. That decline in capital formation indicated that private investment was lower than expected in the second quarter, dragged by a still-slumping construction industry.
While people might be a little more upbeat about the economy following a recent slew of positive data coupled with a stable labor market and a stock market rally in recent weeks, a major threat to Taiwan’s export-reliant economy in the second half is the weakening recovery in other parts of the world. As a result, investment becomes crucial to the economy, be it from the public or private sector, because investment is a key driver of household employment, income and corporate profits.
However, the government’s draft annual budget for next year — approved by the Cabinet on Friday — shows little focus on fiscal stimulus in the form of infrastructure projects, as public construction spending for next year is to be the same as this year at NT$181.2 billion (US$5.68 billion), which is in sharp contrast to the NT$479.4 billion earmarked for social welfare, up by 4.1 percent year-on-year; the NT$106.2 billion allotted to technology development, up by 4 percent annually; and the NT$285.3 billion for education, an increase of 6.7 percent compared with this year.
The stalled growth in public construction spending suggests that policymakers are under pressure to deliver a credible solution to the government’s fiscal constraints and debt pressure, which at the same time has called on public enterprises and private businesses to bear more responsibility in boosting domestic demand. However, recent heated discussion on revisions to labor rules regarding the length of the workweek and overtime pay is souring general sentiment and could expose the nation to the risks of slowing consumption and investment if the confrontations between workers and management and between the ruling and opposition parties over those issues continue.
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