Sunday, February 08, 2009

How bad will the economy be next year?

Hong Kong-based CLSA made global headlines the other day when it predicted that the economy here in Taiwan would contract 11% in 2009:
The forecasts released yesterday are so far the lowest by any bank or broker for those three countries. The comments come a day after the International Monetary Fund underscored the dismal state of Asia's economies by cutting its growth forecast for the region to just 2.7 per cent from a November forecast of 4.9 per cent.

CLSA expects gross domestic product in South Korea, Asia's fourth-largest economy, to shrink by seven per cent this year, reflecting falling exports, consumption and investment. Its previous forecast was for 1.7 per cent contraction.

It expects Taiwan's economy to shrink by 11 per cent in 2009, making it the worst performer in Asia and saying it was "tying with Singapore as the most vulnerable economy in the region". Its previous forecast was for a contraction of 2.7 per cent.

Singapore will be hit by falling trade, declining property prices and its exposure to the financial industry, CLSA said, with GDP likely to shrink 10 per cent, down from its original forecast of a 2.6 per cent decline. CLSA maintained its previous growth forecast for China at 5.5 per cent. It lowered its view on Indonesia, predicting growth of less than one per cent.

The Taipei Times today noted:

Nonetheless, the important issue is not how accurate CLSA’s figure is, but the main reason behind its gloomy forecast: a collapse in the nation’s exports.

People have to face the cruel reality that our economy depends too heavily on exports, which account for about 60 percent to 65 percent of GDP, and it may be a tipping point for the nation to seriously reconsider how to adjust its fundamental economic and financial structures to address Taiwan’s long-term economic development. Second, those who have put their faith in China’s economy should understand that its exports and manufacturing output have continued to fall in recent months, and the global economic slowdown has yet to bottom out.

Obviously, years of investment in China has made Taiwan overly dependent on it, and December’s plunge of 54 percent in shipments to China including Hong Kong, which accounted for about 40 percent of the nation’s exports, should sound alarm bells.

Taiwan took a double hit, first from factories offshoring, and then, from the drop in exports due to the economic crisis. Can can China rescue us? The jury is still out, but I expect that things in China are a lot worse than the government there is letting on (as this piece explains). Taiwan's dependence on exports is inescapable, but its dependence on China is stupid, short-sighted, and unnecessary. Max Hirsch from Kyodo reports on domestic developments in Taiwan -- our vote buying program voucher program:

The Cabinet-level Council for Planning and Economic Development, or CEPD, initially estimated the plan's contribution to GDP growth this year to be about 0.6 percent, but later revised that estimate to one percent, citing a ''multiplier effect,'' as the vouchers change hands like cash and spread their impact across the economy.

''So far so good,'' said Steve Lin, an economics professor at National Chengchi University (NCCU) in Taipei, referring to the plan since it took effect Jan. 18.

''My own expectation is that an extra one percent GDP growth because of the plan is possible,'' Lin added.
It's hard to imagine that the CEPD's upward revision of the effects of the voucher program was anything but political, since the organization of course knows about multiplier effects. The full extent of the program's effect will not be known until September, when the vouchers are withdrawn from circulation, explained Hirsch. A voucher program for education is in the offing.

Exports have plummeted 40%, while unemployment is over 5% (but these unemployment numbers underreport unemployment, just as they do in the US). Take note: the CLSA report correctly pointed to economic problems other than falling exports that are also having their impact: falling domestic and government spending. The investment firm UBS commented several years ago that the fall-off in infrastructure spending had hit the island's domestic economy hard. The government would have been much better off spending that $2.5 billion voucher outlay on infrastructure, where the multiplier effects would have been much greater.

Whatever the actual figures, 2009 is going to be a grim year here in Taiwan.

9 comments:

les said...

The Australians recently launched a stimulus program whereby they gave grants to insulate a few million homes. One, that helps reduce the country's energy bill going forward. Two, it will employ a number of Australians to install the insulation.
What if all of Ma's vouchers were used to buy imported goods? How would that help Taiwan beyond enriching a few trading company bosses?

Benjamin Thompson said...

The size of Taiwan's economy last year was $393.2 billion. $2.5 billion of $393.2 billion is 0.6%. The original figure didn't include the multiplier.

Moreover, I think the voucher scheme was actually quite clever. While there is no doubt some of the money simply replaced what would have been spent on necessities anyways, the fact the $3600 could only be accessed by being spent, combined with the deals offered by many stores (use your vouchers, get $5000 worth of stuff), means the multiplier effect is probably greater than that typically afforded by tax rebates. I would not be at all surprised if the effect turned out to be greater than 1%.

Mu said...

I find it interesting that people pay so much attention to 'the authorities' in this matter who have consistently failed to predict what will happen next. Things, so far in this recession, have continually turned out far worse than government predictions, and in many cases have turned out far worse than *any* prediction.

GDP growth of -10% would certainly be hard to beat, but then again, I didn't hear anyone in Taiwan complain when someone suggested the same number for Singapore a few weeks back. It's puzzling that bad luck is something that only seems to happen to other people.

The idea that handing out free money can alter GDP is kind of insane. If it was that simple, why not just give everyone a million NTD and get 100% GDP growth?

The reality is that any 'extra services/goods' that become part of the economy this year, will represent a drag factor on GDP in the next few years as taxes go up to cover today's borrowing.

I was dining in SOGO in Taipei the other night, and every table in the restaurant was packed with beautiful well-off people (apart from my own). I therefore have trouble believing Taiwan is catching onto reality yet - not by a long shot. Debt fuelled spending is still easy to see, everywhere I look.

When people start looking at their cute little pet dog and wondering what a dogburger would taste like - that's when Taiwan will be really beginning to comprehend what recession is and what it means. All we have currently are a bunch of profligate spendthrifts who've never known hard times, complaining that money isn't pouring into their wallet so fast these days, and thinking they know what recession is. In fact, ladies and gentlemen, the show is about to begin... you cast your votes, now enjoy what you chose.

Michael Turton said...

Nice numbers, sort of what I figured. The decision to include/not the multipliers should have been made at first. however you are right, the math works. An additional .4% growth is a small multiplier. Perhaps you are right in expecting 1%. It seems conservative.

As Graeme notes, the effects do not include secondary negative effects, such as the crowding out effect of government borrowing, and the rise in interest rates. And the debt problem later that will drag spending and growth.

Michael

Thomas said...

It seems the only ones really waxing positive on 2009 are the Chinese. Isn't it a little suspicious that days after Wen, during his European tour, told everyone that China would recover soon, statistics were released that showed that China's manufacturing industry experienced a lesser decline than last month and the PMI was suddenly a little less gloomy too. This while the rest of the world has sunk further in the last month and while purchases of big ticket items by Chinese consumers (cars and houses) are falling.

Mu said...


Moreover, I think the voucher scheme was actually quite clever. While there is no doubt some of the money simply replaced what would have been spent on necessities anyways, the fact the $3600 could only be accessed by being spent, combined with the deals offered by many stores (use your vouchers, get $5000 worth of stuff), means the multiplier effect is probably greater than that typically afforded by tax rebates. I would not be at all surprised if the effect turned out to be greater than 1%.


Benjamin,

there is likely to be little or no 'multiplier' effect since the vouchers, once spent, cannot legally be 're-spent', as far as I'm aware. Money has a multiplier effect because it can be spent, respent, and so on.

In fact, for those many sane people who simply substituted spending with money, and replaced it with a voucher (i.e. save 3600 in the bank), they've replaced something that can be spent and respent easily (cash) with something that cannot (a voucher, which must be separately exchanged for cash, and cannot be immediately be respent by the store (at least, not legally?)).

So in fact this grand scheme may have a negative multiplier effect and shrink GDP, if it results in people replacing cash spending (with is used multiple times) with voucher spending (which is usable once).

Additionally it may induce deflation. You noted that if someone buys $5000 using $3600 of coupons, it increases the size of the economy. This gives me the strong feeling that you did not receive coupons yourself. Why?

Because most of the advertising I saw around the time the coupons were issued, involved items being REDUCED to match the $3600 coupon value from say $4000 or $4500. Can you give me a single example of a shopping coupon advert that encouraged people to 'add $1000' to their coupons?

People showed a strong unwillingness to 'add' their own money as evidenced by the marketing around the days of coupon issue. Everywhere I looked, things were priced in multiples of $3600. It may even have caused mild deflation!

Arty said...

Personally, I think deflation has taken hold already. Regardless what the government do is too late, Taiwan is in a worse situation because it did not ride the big wave during the early 2000s to temper the fall.

If you think last few months are bad, wait till you see near mid this year to the end. DJIA 6000-7000 here we come. Don't want to guess Taiwan's stock but it won't fair much better either; I will worry about Taiwan's currency more to be honest. It looks tasty and exploitable (actually Mexico peso just about to pop, I think).

Red A said...

"What if all of Ma's vouchers were used to buy imported goods? How would that help Taiwan beyond enriching a few trading company bosses?"

Taiwan, as a nation that has greatly enriched itself through exporting, probably shouldn't be upset about a few imported products being bought. Let's see how Taiwan does if America had this attitude?

Secondly, imported products also provide jobs - they have to be warehoused, sold, shipped, marketed just like something made domestically.

Finally, even if an imported product is cheaper and purchased instead of a domestic product, what has actually happened is the "few rich factory bosses" lost some sales while the consumer reaped some savings they could spend on something else.

Besides, tons of "imported" products contain Taiwanese parts.

Rolands said...

Any suprise? And hardlyn someone understands a reason.And a reason is easy - Taiwan, inspired by blue sky dream of US - "every factory worker has his own house and car", went wrong way, losing the market to PRC. Who told that factory worker must drive Mazda Premacy, and own a flat my wife's cousin - she is the low evel factory worker in Hsinchu, does. Taiwan, along with US shoud go down to earth. And then will be no need for Ma vouchers or whatever. just no need watch in mouth to fatherland US.