The turn for the better in Taiwan's dealings with mainland China, resulting in improved access for businessmen and tourists across the Taiwan Strait and eased investment rules, could hardly have come at a better time for the island as its export-dependent economy reels from the global downturn. Stimulus efforts by the governments in both Beijing and Taipei are also helping to lift the prospects for economic growth after a dismal few quarters.
Gross domestic product (GDP) declined 10.2% year-on-year in the first quarter of 2009, worsening a revised decline of 8.6% in the fourth quarter of last year. This is equivalent to a seasonally adjusted annualized decline of 4.3%, improving from an abysmal fall of 23.2% for the last quarter, according to an estimate by DBS Group, who believe that a recovery has already begun based on sequential increases in key indicators since February.
The government now projects a fall in gross domestic product (GDP) of 4.3% for the whole of 2009, revised from a previous estimate of 3% growth. But it forecasts a recovery throughout the year to post quarter-on-quarter increases beginning with the second quarter, and ending with an annualized real growth rate of 5.2% in the fourth quarter, as the government's monetary and fiscal stimulus package begins to take effect.
The government plans to spend about US$25 billion over four years (equivalent to 6% of GDP) on infrastructure, consumer grants and tax cuts. Citibank agrees that the second quarter of 2009, at least, will see a return to quarter-on-quarter growth.
Signs of a recovery are already evident in the important consumer electronics sector. Taiwan Semiconductor Manufacturing, the world's largest custom computer chip maker, has, after a rebound in sales, offered to take back hundreds of workers earlier laid off.
A collapse of consumer electronics exports (down 36.5% year-on-year) was a principal driver behind the recent decline in economic growth, according to Bloomberg News.
The mainland's domestic US$586 billion stimulus package announced last November had already redounded also to the benefit of Taiwanese exports to the mainland as early as March, before the up-tick in consumer electronics demand.
While the recovery is clearly welcome, its duration may be limited. Citibank six weeks ago did not expect the electronics pick-up to extend beyond autumn.
The near-term advantage from increased banking cooperation and exports to the mainland is also likely to be limited, although spending by new tourists from the mainland, resulting from increased air links, could provide a domestic Taiwanese consumption effect that the global situation is unlikely to furnish. The state statistics bureau estimates a boost of no less than 0.4% of GDP for the year from increased tourism.
The Taiwan Stock Exchange Composite (TSEC) seems nevertheless to be tracking rising projections as a leading indicator, as it has lifted itself from close to 4,400 at the beginning of March to almost 6,900 (the highest in nine months). That leaves some way to go before it reaches the high close to 9,300 touched just over a year ago on the day before the inauguration of President Ma Ying-jeou.
Ma, the candidate of the then-opposition Nationalist Party (KMT), had during his campaign promised greater economic exchanges with the mainland.
At the beginning of April, I wrote that the TSEC has "significant long-term resistance at 7,000 (actually a range from 7,002 to 7,326, the latter figure probably marking the upper bound of the lengthy run that it looks poised to make)" and identified the midpoint at 7,162, on a purely technical-chart basis as the likely, perhaps intraday target. (See Taiwan's ambiguous recovery, Asia Times Online, April 2, 2009) and On the cusp, but of what?, Asia Times Online, May 2, 2009).
The retracement from that level, if there is one, would reasonably descend to the low 6,300s, but once there, it would be sorely tempted to fill the gap-up from the beginning of this month from 5,600. On May 3 and 4, the TSEC jumped from there to over 6,300 following the signature of agreements permitting new investment on Taiwan from the mainland. Depending upon the evolution of the chart in the next week, the index could justify a descent to only about 6,000 before regaining its upward rhythm.
That said, new capital inflows to Asia have lately targeted Taiwan country funds, despite their rather high price-to-earnings valuation both absolutely and relative to other Asian markets. An appetite for risk has returned, but it is far from clear how long that will remain.
The Asian Development Bank recently noted that equity markets in the region are generally inexpensive by historical standards, and the bank looked forward to healthier equity markets at least through the end of the present calendar year, thanks to fiscal and monetary stimulus policies and decreasing inflationary pressures.
Still, no one is suggesting that Taiwan or anywhere else will see a return to steady long-term growth in the absence of a generalized worldwide economic recovery, including in the West, permitting a sturdy recovery of external demand.
The corollary, specific to Taiwan, is that the restocking of depleted US inventory in consumer electronics and the launch of new computer operating systems and various handheld devices should not be mistaken for a return of consistent demand.
