Given the war in Ukraine, along with rising prices of food and energy internationally, the global economy is facing growing inflationary pressures and is likely to slow this year, and possibly next year as well. While economists’ forecasts for the global outlook remain far from a stagflation scenario, the probability of the world economy succumbing to a recession is no longer a hypothetical issue, but a question of how severe it might be. Citigroup Inc in a report last week put the odds of a global recession at 50 percent, as central banks tighten their monetary policies and consumer demand weakens amid slowing economic activities.
Taiwan’s export performance has been robust in recent months, with government data showing that outgoing trade increased annually last month for the 23rd consecutive month, hitting the second-highest level on record. Robust global demand for electronics offset negative effects related to China’s harsh COVID-19 rules. Yet there are internal and external challenges for Taiwan. The US economy is facing an increased risk of a downturn, and the outlook for China’s economy is full of uncertainties.
When the central bank on June 16 announced interest rate hikes of 12.5 basis points and an increase of 25 basis points in the reserve requirement ratio, it was threading the needle to maintain a balance between controlling rising imported inflation and supporting domestic consumption threatened by the fallout of recent COVID-19 outbreaks. At an online news conference after the bank’s quarterly board meeting that day, central bank Governor Yang Chin-long (楊金龍) said the rate hikes were a tough decision for all board members, and did not rule out an emergency meeting before the bank’s next scheduled meeting on Sept. 22, should heightened market volatility make that necessary.
Based on the central bank’s assessment, the nation’s economy faces multiple downside risks for the remainder of the year: accelerated monetary tightening by major central banks, which increases downward pressure on the global economy; persistent supply chain bottlenecks and a global food crisis due to the Ukraine war; slowing growth in China despite Beijing’s stimulus measures; sustained inflation expectations for households buoyed by high global inflation; and domestic demand and consumption amid recurring COVID-19 outbreaks.
Many external factors are beyond Taiwan’s control. However, the nation can manage the recovery of domestic consumption and the reopening of borders, which are key to the development of the local economy. Official data released last week showed that retail sales grew 3.9 percent, and food and beverage sales increased 4.3 percent year-on-year in the first five months of the year. Sales in the wholesale sector expanded 9.8 percent to their highest level for the same period, even though domestic COVID-19 flare-ups prompted companies to implement more furloughs while consumers avoided eating out and travel.
Price stability is important to protect incomes and sustain economic growth, even though it might cause the nation some pain. To further bolster the momentum of domestic demand and consumption, the government should expand stimulus measures for the local service sector and small and medium-sized businesses. In so doing, it should be bolder than over the previous two years. Most importantly, the government should implement its stimulus packages and reopen borders earlier rather than later, to ensure that domestic demand grows at a steady pace, and to prevent Taiwan’s economy from facing a more difficult situation if negative shocks from overseas affect it in the near term.
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