Taiwan faces stagflation risk as economic growth this year is expected to slow while inflation remains high, Cathay Financial Holding Co (國泰金控) said yesterday.
A research team commissioned by Cathay Financial said that GDP this year would rise 1.8 percent year-on-year, down from its previous estimate of 2.3 percent, given weaker global demand.
The team, headed by National Central University economics professor Hsu Chih-chiang (徐之強), forecast that inflation would increase 2 percent this year.
Photo courtesy of Cathay Financial Holding Co
“This year’s GDP growth could be slower than inflation, which could be a sign of stagflation,” Hsu told a news conference in Taipei.
Although there is no strict definition of stagflation in which slow economic growth and high inflation coexist, Hsu said what worries them most is that this year’s projected GDP growth of 1.8 percent would be only half of the average growth of 3.6 percent over the past 12 years, while a forecast inflation of 2 percent would be double the average of 1 percent over the same period.
Taiwan’s GDP contracted 0.41 percent annually last quarter and is predicted to fall 1.2 percent this quarter, the Directorate-General of Budget, Accounting and Statistics has said.
If Taiwan enters stagflation, it would be the worst since the 2008 global financial crisis, Hsu said.
In the past, policymakers lowered interest rates to address stagflation, but such an approach would not work when inflation is severe, Cathay Financial economic research department assistant manager Achilles Chen (陳欽奇) said.
With high inflation persisting, the central bank is unlikely to cut rates anytime soon, Hsu said.
The research team predicted that the central bank would raise rates again in the second or third quarter following a 0.125 percentage point hike last week, he said.
“We think the central bank would address the inflation issue first and continue its rate hikes, despite slowing GDP growth,” Chen said.
Cathay Financial expects private consumption to drive the growth momentum this year, rising 4.3 percent this year, as people resume consumption after the COVID-19 pandemic.
The other three pillars of GDP — investment, government spending and net exports — could post slower growth, because of a high comparison base last year and sluggish global demand, the company said.
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