Assessing slump in the economy – ???? Feedzy

By Liang Kuo-yuan ???

On May 26, Taiwan’s official statistics agency, the Directorate-General of Budget, Accounting and Statistics (DGBAS), reported a second consecutive quarter of declining GDP, with the fourth quarter of last year and the first quarter falling by 0.78 percent and 2.87 percent respectively.

Meanwhile, the DGBAS has projected GDP growth for this year would increase by 2.04 percent, with the second, third and fourth quarters rising steadily by 1.82, 3.18 and 5.77 percent respectively.

On June 15, the central bank revised its forecast, saying that this year’s GDP growth would be 1.72 percent, with the projection for the three quarters being 1.40, 2.77 and 5.35 percent.

Although two consecutive quarters of GDP growth declines is conventionally considered to be evidence of a so-called technical recession, after carefully scrutinizing the entire set of realized and forecast numbers, the two straight quarters of declining GDP are expected to disappear as quickly as they arrived. This would be a short and shallow slump, not a precursor to a recession in Taiwan. There is nothing in particular to worry about regarding the macroeconomic outlook of the second half.

The bottom is expected to be the second-quarter figures.

Two factors lay behind the GDP growth trajectory, a pronounced and protracted export drag on one hand and the resumption of normal domestic consumption on the other.

Consequently, for the “short and shallow slump” to become a reality, the export drag must gradually show clear signs of relief and domestic consumption should continue to climb after the post-COVID-19 pandemic reopening. Additionally, the strength from domestic consumption support to GDP growth must exceed that of export headwinds.

Since the start of August last year, the DGBAS has consecutively revised downward economic growth rate forecasts for Taiwan from an initial value of 3.05 percent to the latest 2.04 percent. A similar projection path can be found in the central bank forecasts.

However, given that optimism has been eroded over the past several months, could the forthcoming DGBAS and central bank forecasts be a repeat of the systematic failures that preceded them? More specifically, could the “short and shallow slump” slide into the start of a longer and deeper contraction, or even a recession, in subsequent outlook reports?

The key to answering these questions will hinge on whether the three fundamental causes that have driven the recent path of Taiwan’s GDP growth are temporary or persistent phenomena.

The three fundamental causes are domestic consumption, the global tech cycle and the “China factor.”

While the resumption of domestic consumption will be beneficial, the other two interconnected elements could pose risks to the prospect of Taiwan’s economy.

It is no wonder that local media have portrayed the situation as an economy that is “hot in domestic consumption and cold in external demand.”

Private consumption was one of the hardest-hit GDP components during the pandemic, with the annual growth rates in 2020 and 2021 falling by 2.55 and 0.35 percent respectively. Since the post-pandemic reopening, private consumption has swiftly rebounded and continued to climb, with the annual growth rate bouncing back to 3.54 percent last year and an impressive DGBAS projection of 6.92 percent this year.

This nearly V-shaped recovery in consumption is obvious in hindsight. Looking forward from a macroeconomic perspective, it is generally recognized that private consumption is a relatively stable function. Thus, as activity fully normalizes, the additional support to GDP growth will fade. That said, private consumption will still provide a cushion to the aggregate demand. Nevertheless, it will not be the main determinant of the severity of this slump.

In contrast with the growth path of private consumption, the DGBAS data indicate the inverse in exports of goods and services, with a 17.27 percent upsurge in 2021 followed by a significant drop to 2.25 percent last year. A notable addition to the pessimism is expected, with a projected decline of 0.60 percent this year.

The remarkable performance of exports in 2021 was unique, mainly because the global tech cycle environment was extremely favorable to Taiwan’s tech industries. There were two major grounds for this business thriving:

First, the pandemic generated an upsurge in working from home, remote shopping and a videoconferencing boom. Skyrocketing demand, manufacturing capacity limits, logistics constraints and the just-in-time model had created a global chip shortage storm. With Taiwan being an extremely important hub of the semiconductor production chain, it saw outstanding export performance for its tech products.

Second, the confrontation between the US and China has been continuous since the administration of former US president Donald Trump. Studies and media reports show that it is generally recognized that Taiwan is a big beneficiary.

While the strong demand for tech products was the main driver of the exceptional double-digit growth in exports in 2021, their deterioration since the second half of last year has been caused by a slowdown of the global tech cycle.

High-frequency data show that Taiwan’s exports have registered 10 consecutive months of sequential contraction, with a further decline of 23.4 percent expected last month. The slump has lingered longer than anticipated.

With so many obvious setbacks, the question is how grim will it become in the months ahead?

To get an idea of what could happen next, Gartner’s latest report indicates that as economic headwinds persist, weak end-market demand for tech products is spreading from consumers to businesses. The outlook for the overall global semiconductor sector this year appears worse than initially anticipated, but fortunately, it will be back with a bang next year.

If Gartner’s forecast is correct, which is highly likely, the implication is that regardless of its optimistic view toward next year, this year will still be gloomy for Taiwan’s semiconductor industry.

Taiwan will encounter a reality where China is still by far its biggest export market. Another reality is that China’s economic recovery after it reopened is weaker and not generating positive spillovers as many experts had hoped.

The third reality is that undiminished geopolitical tensions between US and China have had a profound impact on Taiwan. The multidimensional political and economic ramifications of the dispute should not be ignored in any economic investigation of Taiwan.

Domestic consumption, the global tech cycle and the China factor are the three major determinants of Taiwan’s economic growth in the second half. As the economy fully normalizes, additional support from private consumption to GDP growth will fade, so the second two determinants have played a more influential role.

Cyclically, the global tech cycle drag on Taiwan’s exports will take longer to stabilize.

Political and economic ramifications from the US-China geopolitical tensions and other factors will affect Taiwan in an annoying and lingering manner. Considering these factors, the official forecasts of a short and shallow slump run a high risk of leading to complacency.

Liang Kuo-yuan is an honorary professor at National Tsing Hua University’s College of Technology Management in Hsinchu and the retired founder of the Taipei-based Yuanta-Polaris Research Institute.