Taiwan jobless rate masks frail economy
By Robert M Cutler

MONTREAL - Taiwan's economy delivered a small shaft of light on Monday when the June unemployment came in at 4.2%, unchanged from May and one percentage point better than the 4.3% consensus forecast.

The latest figure, down from the 4.4% rate in June 2011, however masks that the number of unemployed persons in Taiwan nevertheless rose in June by 2.4% from May's level, reaching 477,000, perhaps a better indicator of the present state of the island's economy.

Export orders fell for the fourth straight month in June, it was announced at the weekend, with a 2.6% year-on-year contraction after a 3% decline in May. Export orders are interpreted as a leading indicator for exports over the course of the following three months. Exports themselves also declined, the purchasing managers' index (PMI) fell in June and inflation rose. All the moves in these various indicators were relatively or at least fairly small, but they were all unfavorable.



 

More important, these numbers follow on a raft of statistics over the past three months, not only from Taiwan but also from other export-dependent Asian economies, that have increased general fears that the Asian slowdown, expected during the first half of the year, has not yet reached its nadir.

If the slowdown continues long into the second half, then the probability increases that other developments will restrain still further the pickup in growth that is still hoped for before the end of 2012.

The June PMI, compiled by HSBC/Markit, fell below the neutral level of 50. The PMI measures the acquisition of goods and services by purchasing managers. As such, it is a "leading" economic indicator, that is, it is taken to predict future economic activity. A PMI greater than 50 is interpreted as an expectation of economic expansion; lower than 50, the opposite.

Therefore, June's decline in Taiwan's PMI to 49.2 from May's 50.5 signals an anticipation of economic contraction. It especially augurs a weaker recovery by the end of 2012 than had been hoped for. Industrial production fell 0.2% in June year on year, registering the third monthly decline in a row.

The combination of all these small but inexorable declines over the period of a number of months led HSBC's Donna Kwok to note that not only is momentum "starting to soften noticeably" but also "the impact of a continued decline in local stock indices upon domestic demand is rising".

Stock prices are reflecting the negative mood - the benchmark Taiwan Stock Exchange Composite (TSEC) weighted index is down about 13% since March 3. If uncertainty or declines in stock prices continue long enough, then consumers tend to be more conservative, saving their money instead of spending it. That household conservatism leads to decreased domestic demand, therefore in turn to declines in production for the home market.

The index traded at just above 7,000 around midday on Monday, testing a long-term support level. Most short-term technical indicators are negative. The most important medium-term support under the current level is at 6,860, while the most important medium-term resistance to the upside is at 7,280.

Taiwan's exports to mainland China, including Hong Kong, fell 1.6% in June year on year, while export orders for that region fell 3.6%. This decline brings into doubt the degree to which the mainland's announcement a month ago of up to $95 billion in credit to Taiwanese investments in business on the mainland will really help Taiwan's own economy. The move was part of a limited domestic economic stimulus program on the mainland, targeting infrastructure projects and consumer staples.

During the first half of 2012, Taiwan's export orders overall contracted by 0.9%, falling nearly US$2 billion from the equivalent period in 2011. In a potentially worrisome trend, orders are falling not only from developed market economies but also from emerging markets, particularly the members of the 10-member Association of Southeast Asian Nations, plus Japan.

Those Asian economies, in contrast to the chronic difficulties of most of the 34 members of the Organization for Economic Cooperation and Development, have until now provided some growth stability for the region and for the world, and therefore also provided regular demand for Taiwan's exports.

In order to gauge the magnitude of this danger, it will be necessary to watch more closely the statistics coming out of such countries as Indonesia and Malaysia, for which Asian export destinations are generally still more important than those elsewhere.

Notwithstanding this, Moody's economist Katrina Eli wrote that "a sustained recovery in the US and/or European markets" is what is needed for Taiwanese exports "to really be dragged out of the woods", as quoted by the Financial Times.

Taiwan's exports themselves fell 3.2% in June 2012 year on year, although a still sharper drop in imports improved the trade balance in June to $2.6 billion. Electronics and machinery exports grew while basic metals and machinery exports declined. Exports to the US fell 14% year on year in June, while those to Europe declined by 11.9%. The Taiwanese economy will still be "in the woods" for a while to come.

Dr Robert M Cutler (http://www.robertcutler.org), educated at the Massachusetts Institute of Technology and The University of Michigan, has researched and taught at universities in the United States, Canada, France, Switzerland, and Russia. Now senior research fellow in the Institute of European, Russian and Eurasian Studies, Carleton University, Canada, he also consults privately in a variety of fields.

(Copyright 2012 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)