20111106 EDITORIAL: Economic outlook turning bleaker

EDITORIAL: Economic outlook turning bleaker

In the wake of recent economic woes in the developed economies and slowing growth among emerging economies, a small and open economy like Taiwan’s is certainly at risk. The government’s latest economic forecast confirmed that the nation’s GDP contracted in the third quarter and talk of a technical recession is now in the air.

A technical recession is generally defined as two consecutive quarters of contraction in GDP, either from a seasonally adjusted annualized rate (SAAR) basis or a seasonally adjusted quarterly rate (SAQR) basis. The Directorate-General of Budget, Accounting and Statistics’ (DGBAS) preliminary third-quarter GDP data released last week showed the nation’s overall economic output shrank 1.1 percent in terms of SAAR from the previous quarter, or 0.28 percent by SAQR.

The contraction in the third-quarter GDP — the first negative growth in the economy since the first quarter of 2009 — reflects the volatile nature of Taiwan’s export-reliant economy. Despite this, the DGBAS still predicted the economy would continue to expand this year and next year, albeit at a much slower pace than last year’s 10.88 percent.

The DGBAS did not expect the economy to fall into a technical recession this quarter. Its latest forecast said GDP would expand 4.45 percent this quarter on an SAAR basis and 1.09 percent on an SAQR basis. However, researchers at several foreign banks have recently started to address this potential risk to Taiwan. Credit Suisse said on Wednesday last week that Taiwan was the economy in Asia most likely to experience a technical recession this year, after BNP Paribas and the Australia and New Zealand Banking Group offered the same warning last month.

The researchers said whether Taiwan will fall into its first technical recession in two years would depend on sequential changes in exports and industrial output this quarter. As such, the government’s export data for last month, to be released this week, and last month’s industrial output figures for the manufacturing, construction and utility sectors, to be unveiled two weeks from now, merit close attention.

Based on the most recent economic data available, Taiwan’s exports showed weaker-than-expected growth in the third quarter because of dwindling demand from the developed economies, and the Ministry of Finance said last month that because of global downside risks, exports might continue to slow this quarter, even after the economy enters the traditional high season in the fourth quarter.

In addition, HSBC’s latest purchasing managers’ index data showed that Taiwanese manufacturing activity declined for the fifth consecutive month last month and contracted at its fastest rate in almost three years.

However, what might be a more worrying sign was that capital formation — an essential element of economic growth in terms of private investment — could continue to decline this quarter.

The latest DGBAS data showed that capital formation fell 13.45 percent year-on-year in the third quarter and might drop 10.27 percent year-on-year in the current quarter. For the whole of this year, the DGBAS predicted capital formation would contract by 5.73 percent and drop by 0.83 percent next year. This suggests that companies are becoming increasingly conservative about investing in their businesses.

In short, even if the economy manages to avoid a technical recession in the fourth quarter, the risk of it falling back into the red in the first quarter next year cannot be ruled out. Unfortunately, the nation’s strong dependence on overseas trade, accounting for about 75 percent of GDP, makes it extremely prone to sharp economic swings. The government has said GDP would grow 4.56 percent this year and 4.38 percent next year, but the likelihood of more downward adjustments to these forecasts is increasing.