20100906 The economic challenge ahead

The economic challenge ahead

Monday, Sep 06, 2010, Page 8

On Aug. 27, the Council for Economic Planning and Development announced that economic indicators had switched from “yellow-red” to “red” in July, signifying an economic boom. According to the council, improvements in the job market were the driving force behind the change.

However, the leading index declined for the eighth consecutive month, dropping from 28.5 percent in January to below 7 percent in July, or about 3 percentage points each month. According to Wu Ming-huei (吳明蕙), chief of the prosperity section at the council’s Department of Economic Research, “the signs for slower growth in the second half of the year have become increasingly clear.”

She also said the public should not get used to the red status, and that it would be good if Taiwan could maintain a “yellow-red” status in the second half of the year. At the same time, only 29.4 percent of local manufacturers in July were optimistic about the economy over next six months, a new low for the year, while the number of those who were pessimistic increased from 17.2 percent to 17.7 percent, a new high for this year.

After the strong economic growth figures released by the council, these figures are a worrying sign. The government, however, seems unaware of this, as it continues to indulge in the illusion of high growth and make no effort to improve the economy.

Once the bubble bursts, the economy might face another disaster. The government is so pleased with the high economic growth rate in the first and second quarters, at 13.71 percent and 12.53 percent respectively, that it is beginning to fantasize it is the nation’s “savior” and, as such, is sure to gain public support.

As a matter of fact, whether or not the figures are good depends on a comparison with the figures from the same period last year. The economic growth rates then were minus 9.06 percent and minus 6.85 percent in the first and second quarters respectively. If we deduct the negative growth, the economic growth rates for this year were only 4.65 percent in the first quarter and 5.68 percent in the second quarter.

Regardless of who was president in the past, this would not have been considered something worth shouting about. It is perhaps revealing then that the government feels the need to beat its drums and bang its gongs to highlight this “achievement.”

Not to mention that by proclaiming his “6-3-3” policy when he was running for office, President Ma Ying-jeou (馬英九) promised to deliver economic growth of 6 percent. The current high growth rate is merely a numbers game and when the facts have been put straight, the final result is still likely to be that Ma has broken his election promise.

In other words, things have played into the hands of the Ma administration over the last few months and it has done its best to claim responsibility for any and all good news. However, the government is forgetting that many of these gains disappear once we deduct what was already lost.

Although the government can claim to not be a complete loser, that is still a far cry from being a winner. High growth this year simply makes up for earlier losses. In addition, the formula of taking orders in Taiwan and producing goods in China is not beneficial to wage growth, tax revenues or the employment situation.

That is another reason why the public is unlikely to feel the effects of even 12 or 13 percent economic growth.

Moreover, the brilliant figures are also transitory, because the tendency toward slower growth in the second half of the year is becoming increasingly clear around the world. In particular, economic growth in China and the US — on which Taiwan’s international trade is highly dependent — seems to be slowing. This would inevitably affect exports.

For China’s part, the official purchase management index (PMI) declined from 52.1 in June to 51.2 in July, the lowest figure in 17 months, and HSBC’s China Manufacturing PMI fell to 49.4 in July, dipping below 50 for the first time. This is an indication that the operations of the Chinese manufacturing sector are deteriorating, a serious warning sign that we ignore at our own peril.

China has tried to boost its economy mainly by investing more than 4 trillion yuan (US$588 billion), but that massive amount has so far failed to stimulate the manufacturing sector. The result has been a heating up of the real estate market and the wasteful construction of infrastructure, while the manufacturing sector weakens. These imbalances in China’s industrial structure could well be what ultimately causes the bubble to burst.

However, as a result of Taiwan’s dependence on China and the government’s pro-China policies that have deepened that dependence, Taiwan is certain to suffer if there is a serious downturn in the Chinese economy.

The US, Taiwan’s second-largest export market, sits at the epicenter of the global financial crisis, its economy severely damaged by the sub-prime mortgage crisis.

Despite US President Barack Obama’s administration spending more than US$800 billion on economic stimulus, that effort barely kept the real economy from crumbling and still seems some way from successfully revitalizing it. In particular, the US has been unable to lower the unemployment rate, which stands at just under 10 percent.

As a result, some economists have expressed much pessimism about the US economy, believing that the risk of a second economic downturn has greatly increased. These include “Dr Doom,” Nouriel Roubini, who keeps heralding the demise of the US economy and Nobel Prize winner in economics Paul Krugman. Both men believe the US is not yet on the path to recovery.

The fact is that the Chinese economy is full of hidden problems, the US economy doesn’t look very bright and Europe has been shaken by a sovereign debt crisis. In short, the development of the world’s leading economies is fraught with uncertainty.

How can the Ma administration expect to traverse these perilous waters if it is unaware of the crisis?

The government is incompetent and most of its policies are contradictory to our national interest. It might be able to cover up its many failings when when the international financial situation is good, but when the situation takes a turn for the worse, it could just as easily drag the nation’s economy into another downturn and potential disaster.