The National Development Council (NDC) last week reported that Taiwan’s business monitoring indicators remained “blue” for a seventh straight month in May, pointing at a continued economic slowdown, while the index of leading indicators fell for a second consecutive month, adding to worries about persistent weakness in the nation’s export-reliant economy.
The index of leading indicators seeks to forecast the economic landscape in the next six months. After rising for five consecutive months from November last year to March, the trend-adjusted index failed to maintain its upward momentum and started to drop in April. The NDC’s data showed that the index dropped 0.28 percent in May, following a 0.19 percent fall the previous month.
Among the index’s seven components, the reading on imports of semiconductor equipment decreased 0.61 percent monthly in May, following a decline of 0.59 percent the previous month, and the gauge for the floor area of building permits dropped 0.25 percent after a fall of 0.20 percent in April, while export orders also weighed on the index, with declines widening from 0.05 percent to 0.14 percent.
Past studies on the relationship between the index of leading indicators and the annual GDP growth rate have shown a positive correlation between the two, as they tended to peak or bottom out almost simultaneously. As the leading indicators are still falling, it means Taiwan’s economy is not out of the woods yet.
Furthermore, a closer look at the NDC’s data on business monitoring indicators shows that Taiwan’s economic situation remains exposed to short-term downside risks, as inventory destocking in the supply chain is ongoing, while spillover effects have started to affect corporate investment.
For instance, among the nine components that make up the business monitoring indicators, the reading on the manufacturing sector’s business climate, which is used to gauge the economy’s direction in the medium to long term, fell for a second consecutive month in May. The NDC attributed the slowdown to weak growth momentum around the world, which resulted in a longer-than-expected inventory adjustment in the supply chain.
As a result, local manufacturers of consumer electronics continued to report sluggish shipments and steelmakers remained conservative in their outlook, while the prices of petrochemical products, and plastic and rubber goods continued to fall, the NDC’s data showed.
Even though the data on business monitoring indicators revealed that the narrow M1B money supply increased 3.4 percent in May following a 2.7 percent rise the previous month, and the stock price gauge decreased 1.5 percent compared with a decline of 7.5 percent in April, those improvements were driven by near-term factors, such as US chipmaker Nvidia Corp’s blowout revenue forecast in late May, which triggered artificial intelligence (AI) hype around the world and drove foreign fund inflows into AI-related stocks in the local equity market.
The NDC data showed relative resilience in Taiwan’s household consumption and domestic labor market on the back of post-COVID-19 pandemic consumption and the government’s incentive measures.
However, external headwinds remain ahead, such as the implications of central banks’ interest rate hikes and geopolitical confrontations.
In a nutshell, it would be unlikely for the business monitoring indicators to show significant upward movement in the short term, until a definitive turnaround materializes, and the “blue” signal is likely to linger for a while.
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