The GDP data released by the Directorate-General of Budget, Accounting and Statistics (DGBAS) last week highlight a dilemma facing the nation: Strong growth in external trade with below-target domestic demand.
It was a reminder of the central bank’s warning on Nov. 21 last year that soft domestic demand could explain Taiwan’s underperformance in recent years, compared with its regional peers.
According to the DGBAS estimates, the economy ended last year on a robust note, with GDP in the fourth quarter growing a faster than expected 3.28 percent year-on-year, the highest pace of expansion since the first quarter of 2015.
The data also suggested the economy is on course for a modest, but solid recovery — in seasonally adjusted terms — as it expanded 1.03 percent quarterly and 4.17 percent annually.
A breakdown of the data showed that steadily improving private consumption had been accompanied by still strong net external demand — ie, exports minus imports — which contributed 3 percentage points to GDP growth in the fourth quarter.
This took annual economic growth for all of last year to 2.84 percent, not only the strongest pace in three years, but one that exceeded predictions by the DGBAS and other institutes.
Even so, Taiwan remained one of the slowest-growing economies in Asia, compared with South Korea’s 3.1 percent growth, Singapore’s 3.5 percent and China’s 6.9 percent, to name just a few.
It is worth noting why the recovery in external trade did not significantly boost domestic demand: While private consumption contributed 1.47 percentage points to GDP growth, its strength was overshadowed by weakness in government spending and gross capital formation.
Government spending contracted 1.25 percent year-on-year and chipped 0.18 percentage points off the nation’s economic growth, while capital formation fell 4.78 percent annually and eroded 1 percentage point of the GDP growth, the DGBAS data showed. That means overall domestic demand increased just 0.33 percent from a year earlier and contributed just 0.29 percentage points to the economic growth in the quarter.
This raises the question if business confidence has continued to falter in anticipation of the local elections at the end of this year, despite government stimulus measures, and whether wage growth, low unemployment and a stellar stock market performance can be sustained to overcome challenges resulting from an aging population: a shrinking labor pool and higher welfare spending.
Should domestic demand be expected to pick up strongly this year? DGBAS officials last week confidently said that the situation would show a marked improvemen, as there are signs of more investment by semiconductor firms, coupled with an increase in infrastructure spending by the government.
However, it is unclear if the ongoing cyclical rebound in the economy will be able to last much longer, given that the boost to global demand from quantitative easing policies by major central banks is set to fade before long.
The central bank has said the nation’s soft domestic demand is due to the stagnant wage growth, an aging population, slow progress in industrial transformation and a lackluster track record in attracting private investment. It also blamed the slow progress in industrial transformation on local industries’ excessive reliance on manufacturing and the nation’s weak investment in innovation and fundamental research compared with other countries.
There is no doubt that Taiwan benefited immensely last year from the cyclical recovery in the global economy, but the government must address the domestic gloom and export boom if the situation is to continue this year and if the global economy suddenly makes a U-turn.
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