20130804 EDITORIAL: Taiwan must watch for recession

EDITORIAL: Taiwan must watch for recession

The nation’s economy did not perform poorly in the second quarter this year — it expanded 2.27 percent from the same period last year. However, it did not show extraordinary growth. This is a reminder that there is not much to feel comfortable about in the economy.

On Wednesday, the Directorate-General of Budget, Accounting and Statistics (DGBAS) said the growth in GDP in the April-to-June quarter beat its earlier estimate of 1.98 percent growth made in May and was higher than the 1.67 percent seen in the previous three months. More importantly, either from a seasonally adjusted annualized rate or a seasonally adjusted quarterly rate, the economy avoided a technical recession in the second quarter after it contracted the previous quarter.

With these numbers, government officials might breathe a sigh of relief. However, if they look into the composition of GDP — the sum of domestic demand and net external demand — they would know that they have more work to do.

For instance, the latest GDP data show net external demand, or exports minus imports, grew 1.95 percent year-on-year in the second quarter, but the increase was driven more by a fast decline in the growth of imports than a mild increase in exports. Meanwhile, the data also indicate that growth in domestic demand decelerated to 0.38 percent last quarter from 2.17 percent in the first quarter.

What might be a more worrying sign is the slowing expansion in fixed capital formation, a crucial element of domestic demand, as capital formation fell 3.03 percent year-on-year in the second quarter, the first contraction since the third quarter last year, following an increase of 10.02 percent in the first quarter. Capital goods imports, which are highly correlated with capital formation and an indicator of companies’ intentions for investment, increased just 3.95 percent year-on-year last quarter, compared with 13.98 percent growth the previous quarter.

Overall, the latest GDP data show Taiwan’s overall economic output expanded 1.97 percent year-on-year during the first half of the year and the DGBAS maintains its earlier forecasts that the economy could grow by 2.86 percent this quarter and 2.98 percent in the final quarter of the year. However, consumer spending is still weak because of the stagnant growth in people’s real wages and the lack of meaningful improvement in the labor market.

Even though economic activities presented a modest upturn last quarter, whether the economy would recover a firm footing in the second half would depend on sequential changes in exports and industrial output this quarter on the back of continued global demand for Taiwan’s information technology and communication products.

The government’s export data for last month, set to be released this week, and last month’s industrial output figures for domestic manufacturing sectors, to be unveiled two weeks from now, merit close attention. However, the latest purchasing managers’ index data, either the official figures or HSBC’s data released on Thursday, showed that local manufacturing activities continued slowing down last quarter and the weakness is now extending into this quarter, posing challenges to the nation’s growth outlook.

Even if the economy manages to avoid a technical recession in the second quarter, the risk of it tilting toward the downside in the second half cannot be ruled out. That is because the nation’s strong dependence on overseas trade makes it extremely prone to sharp economic swings, while outbound shipments of information technology and communications products, which include computers and mobile phones, remain lackluster. With China’s economy still slowing and the impact of the US Federal Reserve’s anticipated tapering off of its quantitative easing yet to fully unfold, Taiwan needs to be well prepared to avoid falling back into a technical recession.