New Government Faces Economic Challenges

While President elect Tsai Ing-wen will face an array of challenges when she takes office on May 20, her selection for Premier demonstrates that Taiwan’s flagging economy has top priority. As Minister of Finance from late 2003 to early 2006, Lin Chuan pushed a number of tax and finance reforms and was considered instrumental in helping guide Taiwan’s economy during a period of solid growth. Lin later served on the boards of directors of a number of Taiwan’s top companies, including Inotera Memory, Vanguard International Semiconductors, and TTY Biopharm, as well as heading the Democratic Progressive Party (DPP) think tank, the New Frontier Foundation.

With exports continuing their longest slump since the Financial Crisis of 2009, Lin will need to bring this experience to bear to revive growth. GDP growth came in at only 0.75% last year, and 2016 forecasts have already been revised downwards, with the Directorate-General of Budget, Accounting, and Statistics (DGBAS) now expecting 1.47% growth for the year.

Exports, down year-on-year for the 13th month in a row, fell by over 12% in February. China’s slowing economy is having an impact, both directly and because of its effect on the rest of the world, dampening demand for Taiwan’s exports. Demand has dropped across the board, from the United States (down 9.5% year-on-year in February) to Southeast Asian  (down 8.9%) to Japan (down 5.3%), although exports to the EU declined by only 0.4%, apparently indicative  of the success of Europe’s loose money policies.

Taiwan’s all-important machinery and electronics sector is down 8.5% for the year to date in annual comparisons. Other important sectors are also struggling, including plastics and chemicals, both experiencing a 14% export decline on flagging demand and low oil prices. Metal industry exports are down more than 18% for the year.

Export orders, an indicator of future manufacturing activity, came to US$27.67 billion in February, down 19.1% in monthly comparisons and 7.4% in annual comparisons, according to DGBAS. Taiwan’s Industrial Production Index declined 3.65% year-on-year in February, following the 5.99% drop seen in January.

Nevertheless, the private Taiwan Institute of Economic Research (TIER) sees a glimmer of hope in that monetary policies throughout the developed world “have at least helped maintain sufficient liquidity to support business activities.” The think tank also cites stabilizing oil prices and the U.S. Federal Reserve’s decision to hold off on a rate hike as hopefully putting a floor under the economy.

Taiwan’s Consumer Price Index (CPI) surged by 2.4% in February after posting much smaller increases for months. Most economists attributed the rise to the unexpectedly cold weather this winter and its impact on food prices. Unemployment stood at 3.95%, while Taiwan’s Consumer Confidence Index – which measures attitudes towards Taiwan’s economy for the next six months – revived somewhat, increasing to 82.09 from January’s 80.89.