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.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!
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.
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.Let's hope it is all actually true. German GDP contracted 2.1%, I saw today -- scary....
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.