20120415 EDITORIAL: Uncertainty is bad for the economy

EDITORIAL: Uncertainty is bad for the economy

Government officials and many economists have forecast that the nation’s economy might bottom out in the first quarter and start to rebound in the second quarter, given the positive signs from a spate of economic data — including leading indicators, business confidence and industrial output — released by the government since early this year

However, what if those forecasters are simply a little too optimistic? Will the hikes in electricity rates and fuel prices, which the government announced just recently — but of which the potential impact on private consumption and investment was not factored in by forecasters — pose a major source of uncertainty for the nation’s economy in the months ahead?

First, the government’s decision to raise domestic fuel prices by between 7 and 10 percent earlier this month and increase electricity rates by between 8 and 37 percent next month could trigger public fears of rising inflation and curtail consumers’ willingness to spend, given the slim chance of wage increases.

Private consumption accounts for approximately 60 percent of Taiwan’s economic activity, so consumers’ purchasing power is crucial for economic and job growth. Although many economists have so far said that consumers are likely to keep spending at a healthy rate amid a gradually recovering economy, there are signs that producers have begun to consider passing on their rising wholesale costs and retailers are also considering price hikes. Moreover, an expectation of increasing inflation also poses a test for the central bank’s monetary policy, limiting the bank’s scope to adjust interest rates and currency exchange rates to boost the economy.

Second, sluggish growth in developed economies, such as the US and Europe, and slowing growth in emerging economies, especially China, pose risks for a small, export-oriented economy like Taiwan. Growth this year has not been high enough to absorb the slack in the labor market.

Taiwan, like its rivals in the region, depends on a prosperous world market for information-technology products and other items that it manufactures. In the first quarter, the nation’s exports shrank 4 percent to US$70.83 billion compared with the same period last year, with outbound shipments to China, the US, Europe and Japan falling by 9.7 percent, 7 percent, 6.8 percent and 6.8 percent respectively for the quarter. As China and the US are Taiwan’s largest trading partners, their slower economic growth this year is likely to affect Taiwan’s.

Imports contracted 5.9 percent to US$65.17 billion in the first three months from a year earlier, with plummeting imports of capital equipment and machinery — down 20.5 percent and 28.5 percent year-on-year respectively for the period — a source of serious concern. Capital formation is indicative of weak domestic investment, as companies have become more conservative about investing in their businesses, an unwelcome sign for future economic recovery.

Last week, the Asian Development Bank predicted GDP growth of 3.4 percent for Taiwan this year, which was lower than the 3.85 percent projected by the government in February. Some foreign banks have recently adjusted their GDP growth forecasts for Taiwan in response to the new risk factors, with UBS saying the economy would grow by just 1.5 percent this year, compared with Barclays’ 3 percent, DBS’ 2.9 percent, ANZ’s 3.56 percent and Citigroup’s 3.7 percent.

Third, no matter how accurate forecasters’ numbers are, the greatest uncertainty about the nation’s economic outlook resides with the government itself. The government presents its policy initiatives in the name of social justice and fairness — such as the decision to adopt a luxury tax last year, to increase electricity rates and fuel prices this month, and to implement a capital gains tax on securities and futures investments in 2014.

However, given the haste with which such measures have been implemented, the government has shown it lacks consistency in policymaking and the ability to maintain a business-friendly investment environment at home. Uncertainty is the last thing companies and investors want to see.