Publicly listed companies recently unveiled their first-quarter earnings reports, which showed that many firms’ financial results in the first three months of the year were worse than the previous quarter’s. Most companies attributed their poor performance to weakening global demand as central banks worldwide continued to raise interest rates to quell inflation expectations.
The central banks’ monetary tightening, led by the US Federal Reserve, came as global inflation seemed to be driven by an unusual mix of supply shocks associated first with the COVID-19 pandemic and later Russia’s invasion of Ukraine. With inflation surging to multi-decade highs, and price pressures broadening to housing, fuel, consumer goods and other services, central banks recognized the need to move more aggressively to avoid a worsening of inflation expectations, which would have damaged their credibility.
Unfortunately, the results of larger-than-expected interest rate hikes over the past 18 months were that the global economy slowed and demand cooled, while inflation became entrenched. Recent data showed that there is a high probability of inflation remaining stubbornly high in the next few years in the developed economies, as well as in developing and emerging economies.
That looks bad for Taiwan’s economy, which depends on external demand. Government data on April 28 showed that the nation’s GDP contracted for the second straight quarter, by a sharper-than-expected 3.02 percent year-on-year in the first quarter, following an annual contraction of 0.86 percent in the previous quarter. The decline last quarter was the largest since the second quarter of 2009.
On a quarter-on-quarter seasonally adjusted basis, GDP contracted by 1.63 percent in the first quarter, following a 0.37 percent decline in the final quarter of last year, meaning that the economy slipped into a technical recession due to two consecutive quarters of negative growth.
Taiwan’s economy experienced high growth from 2019 to 2021 before slipping to 2.43 percent growth last year. This year could prove to be a hard test for the nation, although economic momentum is likely to pick up a bit in the next three quarters on the back of improving private consumption. GDP growth might not stay above 2 percent this year, but one thing is certain — the electronics sector holds the key to Taiwan’s economic outlook.
In the past three years, rising orders in the domestic semiconductor industry provided firm support to the nation’s economy amid a tech boom. This year, the industry is experiencing weak order intake as tech demand slows and customers further adjust inventories. Taiwan Semiconductor Manufacturing Co, for instance, last month projected that revenue for this year could decline slightly, while other local wafer foundries and IC designers were downbeat about this year’s business as weakening macroeconomic conditions affect demand.
The Directorate-General of Budget, Accounting and Statistics expects the economy to grow 1.67 percent this year, and estimates that the post-pandemic special budget — including the NT$6,000 cash handout for Taiwanese and some foreign residents — is expected to boost GDP growth by about 0.35 to 0.45 percentage points. The economy still has a chance to expand by 2 percent this year.
However, many uncertainties remain globally, including geopolitical risks and the monetary policies of central banks, both of which could affect Taiwan’s external demand and put in doubt the nation’s export outlook. Therefore, aside from the one-off NT$6,000 cash payments, the government should devise measures to boost domestic demand and investment to cushion the weakness in exports. Meanwhile, the public should realize that it is normal to see a correction after years of expansion in economic growth.
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