Taiwan Suffers Biggest GDP Drop in 26 Years

Compiled by Our Staff From Dispatches AP, Reuters Saturday, August 18, 2001

TAIPEI Taiwan's economy shrank 2.35 percent in the second quarter from a year earlier and is expected to decline over the full year, the government said Friday.

The drop prompted the central bank to reduce its key discount interest rate to 3.25 percent from 3.5 percent, the eighth cut since December.

The second-quarter decline in the island's gross domestic product was the biggest quarterly drop in 26 years, the Directorate General of Budget, Accounting and Statistics said.

The island's economy is now expected to shrink 0.37 percent this year, the agency said. That contraction would be Taiwan's first since the government started compiling gross domestic product figures in 1952.

Falling world computer demand is forcing companies like United Microelectronics Corp. to cut production and dismiss workers as sales and profit fall.

Record unemployment and rising levels of bad loans at banks mean spending at home is too weak to keep growth on course.

"Taiwan needs to live with a weak economy for a while," said Andy Xie, chief Asia economist at Morgan Stanley Dean Witter Co. "A substantial contraction this year is on the cards."

Taiwan's GDP is set to shrink 2.5 percent in the third quarter and expand 2.4 percent in the fourth, the government said.

In 2000, the economy grew a revised 5.9 percent.

Exports, equal to about half of Taiwan's GDP, dropped 17 percent in the second quarter from a year ago, according to the government figures.

The government said shipments would probably shrink 15 percent this year because an economic rebound in the United States, the biggest buyer of Taiwan's goods, was taking longer than it expected. (Bloomberg, AFP)

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-- Martin Thompson (mthom1927@aol.com), August 18, 2001

Answers

Taiwan Economy goes into recession

GROWING PAINS: Second-quarter GDP shrank by 2.35 percent, the government's official number-cruncher says. For the full year the GDP figure is expected to be a negative 0.37 percent

STAFF WRITER WITH AGENCIES It's official. The nation's economy has now met the textbook definition of a recession: little or no growth for two or more consecutive quarters.

The government's official number-cruncher reported yesterday that the economy shrank by 2.35 percent in the second quarter.

The poor performance follows sluggish GDP growth of just 1.1 percent in the first quarter.

What's more, the Directorate General of Budget, Accounting and Statistics (DGBAS) now expects that the economy will contract by 0.37 percent for the full year -- a first for Taiwan's economy.

Earlier, DGBAS had forecast that GDP growth would be 4.02 percent for this year.

"It's the biggest drop since a 4.26 percent fall recorded in the first quarter of 1975 due to steep contractions in the island's exports, investment and production caused by a prolonged global slowdown," Lin Chuan (林全), DGBAS director-general, said of the second-quarter numbers.

"Taiwan has been hit the hardest because of its heavy reliance on exports of electronics and telecommunications products to the US market compared to Japan and South Korea. ... After the US economy took a plunge beginning in the second half of last year, there has been no sign of recovery."

Analysts were stunned by the second-quarter figures, with many anticipating a second-quarter decline of around 1 percent at worst.

"Taiwan's economy is deteriorating at a pace that is much worse than we had expected," said Capital Securities analyst Richard Tsai, who had estimated a decline of under 1 percent. "We can say that the country is now officially in recession."

Much of the slowdown can be attributed to falling demand for the nation's high-tech products in the US, Japan and Europe.

Exports, equal to about half of the nation's GDP, dropped 17 percent in the second quarter from a year ago, according to figures released earlier.

The Ministry of Finance expects exports to shrink 13 percent this year as an economic rebound in the US -- the biggest buyer of Taiwanese goods -- is taking longer than expected.

In addition, record unemployment and banks' rising bad loans mean domestic spending is too weak to keep growth on course.

Third-quarter GDP is expected to decline 2.45 percent, but the government forecasts fourth-quarter GDP will rebound and grow by 2.38 percent, Lin said.

A drawn-out recovery in the US and capital flight to China -- where wages are about one-tenth of Taiwan's levels -- are compounding the nation's problems.

That's hurting manufacturers. Taiwan Semiconductor Manufacturing Co (TSMC, 台積電), the world's biggest maker of made-to-order chips, said second-quarter earnings fell 98 percent as customers slashed orders, leaving over half the company's chipmaking machines idle. TSMC expects profit to drop 60 percent this year.

United Microelectronics Corp (聯電), TSMC's biggest rival, turned to a loss in the second quarter and fired 3 percent of its workforce as sales and prices slumped.

Siliconware Precision Industries Co (矽品精密), a chip packager, reported its first-ever loss and trimmed staff by 5 percent by leaving positions vacant when workers left.

Unemployment is climbing as Taiwan companies shed workers and move factories to China to save money. The jobless rate rose to 4.6 percent in June, the highest since the government began compiling figures in 1978.

China's government-fuelled, faster economic growth and lower costs are draining money from Taiwan. Foreign direct investment in Taiwan fell 22 percent in the first half from a year earlier, while Taiwanese investors spent 23 percent more on projects in China.

A 16 percent slump in Taiwan's key stock market last quarter put an added drain on the economy, damping consumer spending and corporate investment. Banks saddled with a rising number of bad loans were reluctant to lend.

"The equity market is a proxy for domestic confidence," said Paul Alapat, an economist at Nomura International [Hong Kong] Ltd. "The financial sector has only been highlighted, not resolved."

URL=[http://www.taipeitimes.com/news/2001/08/18/story/0000099040]

-- Martin Thompson (mthom1927@aol.com), August 18, 2001.