Crowds at amusement parks and tourist attractions, as well as long lines at several night markets during the recent long weekends, were signs of recovering consumer spending, which supports the nation’s faltering economic growth as exports slump due to weak global demand.
However, consumers are likely to tighten their belts amid sticky inflation after a hike of 11 percent on average in electricity rates this month, alongside rising costs of food and rent.
Taiwan’s inflation is lower than in many other countries, as the government strictly controls prices of imported energy, which has helped reduce fluctuations in the consumer price index (CPI), with the Directorate-General of Budget, Accounting and Statistics’ (DGBAS) inflation calculation much lower than those of other countries.
However, a closer look at the DGBAS’ CPI basket shows that the costs of dining out and prices of items purchased more than once per month have increased more than 5 percent from a year earlier during the first two months of this year. With higher prices of eggs, cooking oil and meat, which are items people regularly consume, the public’s perception of inflation is higher than the headline inflation of about 2 to 3 percent announced by the DGBAS.
The nation’s meager economic growth this year is likely to add to people’s problems, with slower GDP growth potentially leading to more furloughs. The DGBAS and the central bank have lowered their GDP growth estimates this year to 2.12 percent and 2.21 percent respectively, while the economy could expand by less than 2 percent, some private think tanks said.
It remains to be seen whether the economy will receive a boost from the government’s one-off cash handout of NT$6,000 (US$197) for Taiwanese and eligible foreign residents.
However, Taiwan faces the challenge of maintaining GDP growth higher than 2 percent this year while keeping inflation at bay, after the DGBAS and the central bank lifted their respective CPI forecasts for this year to 2.16 percent and 2.09 percent.
Furthermore, the nation risks facing stagflation for a second consecutive year this year, with GDP growth lower than previously expected and inflation higher, while debates about whether the central bank’s monetary policy should be more hawkish to fight inflation, or remain dovish to support growth, continue to intensify.
Over the past five to six decades, Taiwanese have been accustomed to a pattern of higher economic growth and low inflation. Although GDP expansion since 2000 has not been as robust as it was before, the public generally did not fear stagflation, because inflation has been kept relatively low over the years.
However, this year could be different, and policymakers face challenges to address pressures on growth and high inflation.
To address stagflation, the central bank can either raise interest rates to reduce inflation or cut interest rates to boost economic growth. However, it is unlikely to cut rates any time soon, as high inflation persists, but it has also refrained from aggressive monetary tightening since March last year given its gradual and calibrated rate hike trajectory.
Policymakers must carefully balance inflation controls and economic growth measures, effectively curb people’s inflation expectations and maintain policy credibility, while closely monitoring the economic climate abroad and monetary policies adopted by other central banks.
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