Council for Economic Planning and Development Executive Yuan June 2008 TAIWANS ECONOMIC SITUATION AND OUTLOOK 2 CONTENTS I.CURRENT DOMESTIC SITUATION Economic Growth Foreign Trade Domestic Investment Industrial Production Employment Prices Money and Interest Rates Business Cycle Conditions II.PROSPECTS FOR 2008 III.POLICY INITIATIVE 3 I. CURRENT DOMESTIC SITUATION Economic Growth Taiwans real GDP grew 6.1% in the first quarter of Exports expanded 11.4% year on year, helping boost manufacturing and related services growth. Despite a worldwide slowdown, the economy is forecast to grow 4.8% in 2008, contributed mainly by moderate export growth and a 10.5% increase in government fixed investment. Economic growth Domestic demandNet foreign demand Total ConsumptionGross fixed capital formation Increase in inventoryTotal Exports of goods & services Less: Imports of goods & services PrivateGov'tSubtotal Private sector Public enterprisesGov't r f Q1 p Q2 f Q3 f Q4 f P = Preliminary; f = Forecast; r = Revised. Source: Directorate-General of Budget, Accounting, and Statistics (DGBAS) Real GDP Growth (Change from a year ago) 4 CURRENT DOMESTIC SITUATION Economic growth (yoy) Domestic demandNet foreign demand Total ConsumptionGross fixed capital formation Increase in inventoryTotal Exports of goods & services Less: Imports of goods & services PrivateGov'tSub-total Private sector Public enterprisesGov't r f Q1 p Q2 f Q3 f Q4 f P = Preliminary; f = Forecast; r = Revised. Source: Directorate-General of Budget, Accounting, and Statistics (DGBAS) Contribution to GDP Growth (in percentage points) 5 CURRENT DOMESTIC SITUATION Domestic Investment In the first quarter of 2008, private fixed investment grew 6.7%, due mainly to a 16.1% growth in the import of capital equipment. For 2008 as a whole, gross fixed capital formation is forecast to grow 5.9 %, with a 10.5% increase in government fixed investment. F = Forecast. P = Preliminary. R = Revised. Source: DGBAS Gross Fixed Capital Formation: Real Growth and Current-price Value NT$ billion; yoy % TotalPrivate investment Public enterprise investment Government investment AmountGrowth rateAmountGrowth rateAmountGrowth rateAmountGrowth rate , , , , , , , , , , r 2, , f 2, , Q1 p Q2 f Q3 f Q4 f 6 CURRENT DOMESTIC SITUATION Foreign Trade Exports and imports expanded 17.4% and 22.4%, respectively, in the first five months of A trade surplus of US$6.5 billion was recorded during January~May 2008, down US$2.6 billion year on year. Foreign Trade US$ billion; yoy % TradeExportsImports Balance ValueGrowthValueGrowthValueGrowth Jan-May Note: Trade data are adjusted according to the United Nations IMTS Compilers Manual (2004). Total exports include exports and re-exports, and total imports include imports and re-imports. Source: Ministry of Finance. 7 CURRENT DOMESTIC SITUATION Changes in Two-way Trade with Major Trading Partners yoy % ExportsImports USAJapanEurope China (incl. Hong Kong) ASEAN 6*USAJapan Middle East China (incl. Hong Kong) ASEAN 6* Jan-May Share *ASEAN 6 refers to Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam. Source: Ministry of Finance Share Major trade partners China (including Hong Kong) and ASEAN have become increasingly important trade partners to Taiwan since 2000, though trade with these two regions has grown more slowly in the last three years. Japan has remained Taiwan's largest supplier of imports, despite a narrowing share. Export shares of the United States, Europe and Japan have narrowed as those of China (including Hong Kong) and ASEAN have increased. 8 CURRENT DOMESTIC SITUATION Production Industrial production grew 11.6% in the first four months of 2008, with manufacturing output increasing 12.1%. Growth of Industrial Production Index yoy % Source: Ministry of Economic Affairs. 9 CURRENT DOMESTIC SITUATION Unemployment rate and labor force participation rate The unemployment rate decreased slightly to 3.8% in April 2008, having fallen substantially from its historic high of 5.2% in The labor force participation rate in April 2008 was 58.2%, an increase of 0.1 percentage point year on year. Source: Directorate-General of Budget, Accounting and Statistics. Unemployment rate Unemployment % Labor force participation rate Labor force participation % 4 10 CURRENT DOMESTIC SITUATION Prices In May 2008, the CPI showed a rise of 3.7% year on year, with increased prices of food, fuels & lubricants, and taxi fares, offsetting decreases in part of communication and telecommunication charges. Core prices (excluding fresh food and energy prices) climbed 3.2%. Also in May 2008, the WPI showed an increase of 7.7% year on year, due mainly to the rising prices of crude petroleum, natural gas, petroleum & coal products and basic metals. Source: Directorate-General of Budget, Accounting and Statistics. Core CPI yoy % 11 CURRENT DOMESTIC SITUATION Money Supply In April 2008, M1B continued its downward trend to a year-on-year decline of 1.7%, while M2 grew 2.1%. The higher M2 growth rate was mainly due to an upswing in bank credit growth. Source: Central Bank of China (Taiwan). 12 CURRENT DOMESTIC SITUATION Short-term Interest Rates Since the second half of 2003, both long-term and short-term market interest rates have trended up, as tight funding conditions prompted banks to adopt a cautious attitude towards lending operations. The commercial paper rate and interbank rate stood at 2.04% and 2.11%, respectively, in April The rediscount rate was raised by 12.5 bps to 3.5% in March 2008, mainly to counter rising inflationary pressures. Source: Central Bank of China (Taiwan). 13 CURRENT DOMESTIC SITUATION Stock Price Source: Taiwan Stock Exchange. The stock exchange index plunged to 3,782 points in October 2001 in the wake of the 911 terrorist attacks in the US and the downturn in the information and communications industries, before bouncing back to an increasingly positive trend. The index averaged 8,510 points in 2007, up 24% from the previous year. In May 2008, the index was up 10.2% year on year. 2008 14 CURRENT DOMESTIC SITUATION Monitoring Indicators In April 2008, the total score of the monitoring indicators rose to 27, with the light signal showing "green" for the sixth consecutive month. Source: Council for Economic Planning and Development. 15 Monitoring Indicators and Economic Growth Source: Council for Economic Planning and Development. 16 CURRENT DOMESTIC SITUATION Source: CEPD. Composite Leading Index (Annualized 6-month rate of change) Composite Coincident Index (Trend adjusted) 17 II. PROSPECTS FOR 2008 Taiwan to maintain solid economic growth Although the U.S. subprime mortgage turbulence has been spreading to international financial markets, it has had only very limited direct impact on Taiwans economy. However, the tightening effect remains a source of threat to the overall economy. Taiwans economy is forecast to grow 4.78% in 2008, with per capita GDP reaching US$18,585. Exports are expected to grow at a moderate pace Despite the gloomier global economic prospects, exports are projected to increase by 12.3%, supported by the sound economic situation in emerging markets. Taiwans opening to tourists from China will also help increase the export of services. Imports are projected to increase by 16.3%, due to rising prices and the demand induced by export expansion. Private consumption to keep up steady growth Several factors including the continued improvement in the job market, the increasing cash dividends provided by strong corporate profits, and more open cross-strait policies will continue to help sustain private consumption growth at a projected rate of 2.4% in 2008. 18 PROSPECTS FOR 2008 Domestic investment is expected to rise Despite the reduction in aircraft purchase by private airlines and lower capital spending by foundry manufacturers, private investment is projected to increase 4.9% in 2008, mainly due to investment in production facilities for next-generation flat-screen display, the extension of optical and wireless network communication facilities, the improvement of the investment environment, and the implementation of BOT projects such as sewer system construction. Government investment is forecast to grow 10.5%, due mainly to local infrastructure development under the governments domestic demand expansion package. Inflation remains a concern Though rising international oil and commodity prices will push up wholesale prices, this should be offset to some extent by the appreciation of the NT dollar, with the WPI projected to rise by 5.9% over the whole of Despite the cancellation of import tariffs on basic food commodities and the appreciation of the NT dollar, surging global energy and food costs, and the hikes in petroleum product, gas and electricity prices necessitated thereby, will create inflationary pressure for consumer prices, with the CPI projected to rise by 3.3% over the whole of 2008. 19 Forecasts for Taiwans Economy in 2008 CIER: Chung-hua Institute for Economic Research, Taipei. TIER: Taiwan Institute of Economic Research, Taipei. DGBAS: Directorate-General of Budget, Accounting and Statistics, ROC (Taiwan). Forecasting institution Date of issue Real GDP Consumer Prices % Change from last forecast (% point) % Change from last forecast (% point) World Bank April IMF April Global Insight May CIER April TIER April DGBAS May Academia Sinica Dec 20 III. POLICY INITIATIVE Current Price Stabilization Package Measures Principles and Modes of Energy Price Adjustment 1.Oil and gas prices: (1) Revision of the current floating oil-price computation formula, elimination of the existing 12% price-rise cap. (2) One-time rise and diverse absorption. Users to bear 60%, and the government and CPC each to bear half of the remaining 40% (the government by lowering the commodity tax, and CPC by raising efficiency). (3) The price adjustment process should be accompanied by measures to alleviate its impact on the peoples livelihood and industry. 2. Electricity: (1) Just to reflect the increased fuel and electricity-purchase expense caused by the higher price of fuel. (2) Giving special consideration to looking after the disadvantaged and the peoples basic living needs. (3) During the summer pricing period, the price of electricity will be raised by only one quarter of the amount by which it needs to be adjusted. 21 III. POLICY INITIATIVE Current Price Stabilization Package Measures Measures in Response to the Rising Prices of Daily Necessities (1) Encouraging the replanting of fallow fields (2) Tapping new sources and regulating flows, to increase the volume of public grain stocks held by the government. (3) Controlling rice exports to stabilize domestic demand, but continuing to undertake humanitarian aid. (4) Expanding the import sources of such staple food commodities as wheat and corn, to lower import costs as a means of keeping domestic prices stable. Lowering Customs Duty, Promoting Energy Saving and Carbon Reduction, and Raising Industrial Productivity Macroeconomic Policy Support Measures for Bolstering Care of Disadvantaged Members of Society Strengthening of Price Surveillance Measures 22 More open Cross-Strait policy (1)Cross-Strait Weekend Charter Flights Taiwan will actively negotiate with mainland China on the airports to accommodate the flights, the airlines to operate them, the flight schedule, and other relevant matters, with the two sides to grant mutual authorizations on an equal and reciprocal basis. Once consensus has been reached, the Ministry of Transportation and Communications (MOTC) will implement the flights as soon as possible. In addition to Taoyuan and Kaohsiung International Airports, as used for the current festival charter flights, six other airports in Taiwan (Taipei Songshan, Taichung Qingquangang, Hualien, Magong, Kinmen, and Taitung) have been earmarked to accommodate the flights subject to the consensus reached by the two sides. How many airports are actually used for the flights will be determined entirely by the market mechanism. III. POLICY INITIATIVE 23 More open Cross-Strait policy (2) Mainland Chinese Tourists Visiting Taiwan Taiwans Straits Exchange Foundation (SEF) and China's Association for Relations across the Taiwan Straits (ARATS) will start the official negotiations on June 11. The first phase will focus on direct weekend charter flights for passengers and allowing Chinese tourists to come to Taiwan. SEF and ARATS have already conducted six rounds of technical negotiations concerning mainland Chinese tourists visiting Taiwan. Matters covered in these negotiations include tourist identity checks, the repatriation of illegal stayers, rules for travel agencies reception of tourists, the mediation of tourism disputes, and the establishment of a reporting window. To prepare for the opening of Taiwan to the arrival of 3,000 mainland Chinese tourists per day from July 2008, the MOTC will carefully map out and amend related laws and regulations with a view to ensuring the quality of the tours and the sustainable development of the mainland Chinese tourist market. III. POLICY INITIATIVE 24 Program for Strengthening Local Development Construction to Expand Domestic Demand III. POLICY INITIATIVE Background Local development construction has a key bearing on the peoples living and production environment and the preservation of the eco-environment. However, since local governments commonly have financial difficulties and have already reached their public debt ceilings, they are unable to meet the pressing needs for quantity and quality of local development construction. At the same time, the impact of soaring oil prices and the US subprime mortgage storm has caused a downturn in global economic growth, also affecting and damping Taiwans economic growth. Targets To stimulate economic growth and assist the implementation of local public construction, the government estimates that it will need to spend a total of NT$ billion on improving local public infrastructure, and is planning to put this into effect before the end of 2008 with a view to boosting economic growth momentum and facilitating life for the general population. 25 Conclusion The IMF and Global Insight have lowered their 2008 global GDP forecasts, mainly due to the turbulence in international financial markets and the surging oil prices. Despite the deteriorating global environment weighing on Taiwans exports, improved relations with China and expanding domestic demand should sustain its economic growth in the coming years. We also expect closer economic ties with China to have a positive impact in the long term. Under the threat of inflationary pressure, the government will closely monitor price changes and take all necessary measures to achieve its GDP growth target of 4.8%. With the launch of the i-Taiwan 12 Projects and other new development initiatives under the new administration, Taiwan should be able to look forward to a bright future in which per capita GDP will rise steadily to its targeted level of US$30,000 by 2016. Thank you This summary is prepared by the Department of Economic Research of the Council for Economic Planning and Development (CEPD). Quarterly updates can be found on the CEPDs website atFor inquiries call or send anto