Friday, February 13, 2009

Economist On Our Sinking Economy

The Economist notes that Taiwan has suffered "much the biggest shock" in its piece on our ailing economy:
Exports to China have declined by 59% over the past year, twice as fast as exports to America. Sales to China (over one-quarter of the total) consist largely of electronic components, and have been hit by massive Chinese destocking. The island's electronics industry is enduring its worst-ever slump. Cheng Cheng-mount, a Taipei-based economist with Citibank, points out that Taiwan's mainstay exports, such as flat-screen monitors and semiconductors, were in oversupply even before the global financial crisis. Now, he estimates, Taiwan Semiconductor Manufacturing Company, the world's biggest contract chipmaker, is running at around 35% of capacity.

Falling exports have, in turn, squeezed domestic spending. Unemployment rose to a six-year high of 5% in December, and the true picture may be far bleaker. Taiwanese companies tend to wait until after the lunar new year holiday before swinging the axe. Average wages have also fallen by 5% in real terms over the past year. Many companies are ordering employees to take unpaid leave. The volume of retail sales slumped by 11% in the year to December.

Even before the financial crisis, household spending had seen the weakest growth rate among the East Asian tigers. One reason is that people with the spending power are elsewhere. Over the past eight years, around 1m Taiwanese business executives, who form much of the island's moneyed managerial class, have moved to China to run factories there. Several economists are now forecasting that Taiwan's GDP will contract by 3% or more this year, which would be the steepest downturn in Taiwan's history. By far the gloomiest is CLSA, a broking firm, which is predicting a horrendous 11% drop in 2009.

To prop up the economy, the central bank has cut interest rates six times since September, to 1.5%. The government also plans a fiscal stimulus of infrastructure investment, consumer handouts and tax cuts worth around 3% of GDP in 2009. To boost consumer spending, the government is giving each citizen a voucher worth NT$3,600 ($106). But many economists are sceptical about whether this will produce much new spending. According to Chen Miao, an economist with the Taiwan Institute of Economic Research, a similar cash-handout scheme in Japan resulted in only 30% of recipients spending more than they had already planned. Anecdotal evidence so far paints a brighter picture. Department stores and supermarkets reported that sales over the lunar new year holiday were 10-20% higher than in 2008.

In the longer term, improved ties with China will benefit the economy. For example, says Mr Chen, more direct flights between Taiwan and China should help. If Taiwan-based businessmen came home every quarter instead of every six months, it could boost ailing consumption. For now, however, Taiwan's frightful economic news is more likely to encourage households to save rather than spend.
I love it -- after recounting the damage China has done to the economy, from executives taking their purchasing power to the Middle Kingdom, to the rapid drop in exports to China ("twice as fast" as exports to the US), nevertheless the Economist's writer can still form the thought that "improved ties with China will benefit the economy." The China Cargo Cult lives!

Meanwhile the GIO says vouchers lifted the economy in a Taiwan Journal editorial commentary this week:
In this period of economic doom and gloom, governments around the world are seeking ways of strengthening their economies and restoring consumer confidence. For Taiwan, the consumer voucher program has accomplished just that, providing a welcome shot in the arm for the economy.

With over 90 percent of coupons collected on the first day of issue Jan. 18, the nation's consumers set out on a shopping spree of impressive proportions. Just three weeks after launching the initiative, retailers had redeemed 34.9 percent of the voucher's entire volume issue, totaling NT$29.3 billion (US$866.8 million). This had the immediate effect of stimulating demand, with retail analysts reporting a surge in sales of between 10 and 30 percent on average--a better-than-expected result.

As with most things in life, timing is everything, and the decision to distribute the vouchers just before Lunar New Year has proven to be a masterful one. By encouraging consumers to loosen their purse strings at a time when people are traditionally looking to indulge, the disastrous temptation of holding back this year because of the economic downturn was avoided.
Let's hope it is all actually true. German GDP contracted 2.1%, I saw today -- scary....

10 comments:

Anonymous said...

When did Taiwan Journal get that sycophant tone?

TSMC is running at 35%??

There is a lot of room for consolidation. TSMC + UMC. AUO + CMO + smaller players. All DRAM players. Asus is funny--they can design, they have a good brand, but they don't have anyone that runs the ship competently (inventory, logistics, sales channels); poach someone from Acer is a good way to go.

The Taiwanese disease of everyone wanting to be the boss of the smallest piece of turd needs to end. In a good environment, everyone shooting for the moon was tolerable, but these mergers even then would've made sense because of the greater pricing power it would've given the companies, but now it's a requirement.

What's worse now is in a good environment we could've hoped for private equity or some other idiot group to buy in a force a merger. Now it's up to the government and these often founder-run or family-run companies to put together deals; not a recipe for success if you ask me.

Tim Maddog said...

Michael, you wrote:
- - -
[A]fter recounting the damage China has done to the economy, from executives taking their purchasing power to the Middle Kingdom, to the rapid drop in exports to China ("twice as fast" as exports to the US), nevertheless the Economist's writer can still form the thought that "improved ties with China will benefit the economy."
- - -

Other than "being paid by China to produce propaganda," can anyone come up with a more plausible explanation for such behavior?

Tim Maddog

Roy Berman said...

While I agree with all your criticism, really what's the point of tearing apart an article posted in a government propaganda organ? Taiwan Journal is just a bunch of press releases from the current executive branch, not anything approaching a real journal, or even a lame magazine.

They may publish a piece on some interesting bit of local culture once in a while, but that's still nothing but tourism-promoting PR.

Michael Turton said...

When did Taiwan Journal get that sycophant tone?

When the new administration came in.

Roy, I assume you mean the post above this one? So that it is there for people who search Green, and later, when I put out a book, I will remember this article and comment on it.

Michael

Arty said...

You guys are so funny. If you listen to me by "shorting" the market, you will be truly rolling in "green."

I don't even want to argue with Michael or any greentards (far better than the KMTards sounding wise) on economics these days. So wrong in their believes, and yet they still don't realize how wrong they are. I will put it in simple terms. Stop blaming others, and look at your own actions. Outsourcing will not stop, and cannot be stopped by any governmental actions. The problem is the backward policies preached by the last administration that have fundamentally hurt any chance of Taiwan economic dominance over anyone. Taiwan's industry did not transform when it needed to be and today is probably too late.

Oh if you really keeping up with the economic data, you will realize China already begins to show signs of recovery while US is still at the beginning. Hint: Current S&P500 P/E is still around 15 while in all recessions it usually drops below 10. You do the math.

Michael Turton said...

Outsourcing will not stop, and cannot be stopped by any governmental actions. The problem is the backward policies preached by the last administration that have fundamentally hurt any chance of Taiwan economic dominance over anyone.

Who said outsourcing was going to stop? Put down the crack pipe, please.

The policies of the previous administration permitted $200 billion in Taiwan investment to flow into China. The results are obvious, at least to those who have eyes.

Oh if you really keeping up with the economic data, you will realize China already begins to show signs of recovery while US is still at the beginning.

I do believe in Chinese government statistics, I do believe in Chinese government statistics, I do...

Michael

Roy Berman said...

Uhhh, yeah... Somehow I commented on the wrong post. Weird.

Arty said...

The policies of the previous administration permitted $200 billion in Taiwan investment to flow into China. The results are obvious, at least to those who have eyes.

It is all relative Michael, it should be a lot more in trillion at least.

I do believe in Chinese government statistics, I do believe in Chinese government statistics, I do...

Clearly no clue, the data that I am mentioning is a US one looking at several factors including energy consumption. Like I said, believe what you want, I will just profit from it.

Anonymous said...

The problem is the backward policies preached by the last administration that have fundamentally hurt any chance of Taiwan economic dominance over anyone.

And what policies are those?

Anonymous said...

"Who said outsourcing was going to stop? Put down the crack pipe, please.

The policies of the previous administration permitted $200 billion in Taiwan investment to flow into China. The results are obvious, at least to those who have eyes."

So, in other words, you imply the government should not have allowed the outsourcing, i.e. investment in foreign countries. Isn't that what your saying?