20110731 EDITORIAL: Being realistic about the economy

EDITORIAL: Being realistic about the economy

The Directorate-General of Budget, Accounting and Statistics (DGBAS) on Friday revised downward its economic growth forecast for this year amid uncertainty over the strength of the global economy, even though the Taiwanese economy showed stronger-than-expected growth of 4.88 percent in the second quarter of this year.

However, it is worth noting that 4.88 percent growth is the weakest since the fourth quarter of 2009. Moreover, on a seasonally adjusted, annualized basis, the economy actually contracted by 3.61 percent in the second quarter from the previous quarter, reversing an 18.54 percent rise in the first quarter and representing the first contraction since the first quarter of 2009.

The DGBAS said it now expected the economy to expand by 5.01 percent for the full year, lower than the 5.06 percent it forecast in May. With an average of 5.72 percent growth in GDP in the first six months of the year based on government data, the economy is predicted to slow to an average growth of 4.31 percent in the second half of the year, 0.18 percentage points lower than the previous estimate made in May. The weakening growth momentum is reflected in the slew of economic data released recently, the eurozone’s sovereign debt crisis and the lackluster economic recovery in the US.

First, the Ministry of Economic Affairs said on July 20 that growth in export orders fell to 9.18 percent last month, the slowest increase since February, which indicates a moderation in the increase of Taiwan’s overseas shipments over the next one to three months.

On Monday, the ministry’s industrial production data showed last month’s output rose 3.61 percent year-on-year, the slowest rate in nearly two years, offering more evidence that external uncertainties are weighing on domestic manufacturers.

On Wednesday, the Council for Economic Planning and Development said the index of leading indicators — a gauge of future economic development — rose less than expected last month. More surprisingly, the annualized six-month moving average of leading indicators, which provides a more accurate forecast of business cycles, fell by 0.6 percentage points month-on-month last month, falling for the 19th consecutive month.

A major threat to Taiwan’s export-reliant economy in the second half of the year are the signs of weakening recovery in other parts of the world, especially in developed nations. Therefore, it is not surprising that several Taiwanese high-tech companies announced over the past two weeks that they have cut third-quarter revenue forecasts and lowered capital investment targets for the year, reflecting a more conservative outlook.

As such, the government is pinning its hopes on the strength of private consumption to help bolster the economy as external demand and domestic investment turn weaker. This is why the arrival of Chinese tourists and their spending power are considered so crucial to the economy.

However, the real question is whether Chinese tourists will really make a major contribution to the local economy, whether they arrive in group packages or as independent visitors. Indeed, concerns about their lower-than-expected spending and delayed payments by Chinese tour agencies to their Taiwanese counterparts have cast doubt on this policy, suggesting more time is needed to turn this dream into reality.

For the time being, signs of external demand remain uncertain and the chances of running into more challenges by the end of the year abound. If private consumption falls short of the government’s estimate — and most importantly, if rising inflation further reduces household purchasing power — the government may yet have to rethink next year’s GDP forecast, just as it is revising this year’s.