Closer economic ties with China will neither boost Taiwan’s consumer confidence, nor increase domestic consumption to bolster the local economy, UBS Investment Research said in a report yesterday.
“We don’t think that tense cross-strait relations caused consumer confidence to fall and led to weaker consumption,” said the report, authored by the investment banker’s chief economist Sean Yokota.
“The main reason for weak consumption is lack of income growth and households repairing their balance sheets, rather than a confidence issue,” Yokota said.
UBS expects the nation’s consumption to remain weak in the next three quarters from a combination of low income growth, the deleveraging process that has dampened consumption since the credit card crisis in late 2005 and high interest rates.
The report said a recovery could follow in the second half of next year on the return of global demand and likely central bank interest-rate cuts.
The government’s infrastructure budgets will also be factored in next year to boost the local economy while consumers’ balance sheets will be in better health to boost spending, the report said.
UBS said that it believed domestic consumption was the main driver behind the nation’s economic growth.
Since 2000, consumption has generated 60 percent of the local economy, which used to see an average 7.8 percent growth annually in the 90s, but has fallen to only 2.6 percent after 2000, despite consumers spending a bigger share of their incomes and using less for savings and tax payments, the report said.
After the profitability of the manufacturing sector started slowing in the late 1990s, the nation’s real income has averaged just a 0.7 percent year-on-year growth, down from the 4 percent average in the 90s.
In terms of monetary policy, Yokota estimated that the central bank would hike the interest rate by another 12.5 basis points this month to keep inflation pressures and capital outflows in check.
“I think the central bank sees prolonged inflation eating away consumer's purchasing power as a bigger problem than a mere 12.5 basis points hike now,” he said in an email.
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