Card-debt burden depresses private consumption

This article was published by the Taiwan Headlines on March 22, 2006. It reports that a recent decline in private consumption in Taiwan may have been the result of rising prices, reduced real pay, higher interest rates and soaring card debts. Such decline appears to be posing a severe challenge to the government's goal to keep Taiwan's economic growth rate above 4 percent.

In recent months, many department stores have failed to reach their revenue targets. The Chinese New Year's sales in January 2006 were also disappointing - some local department stores even suffered sales declines in that month. The depression in sales appears to have spread to fashions and cosmetics, which generally enjoy booming sales.

Other businesses, like hypermarkets, also saw their sales decline. Most of them failed to live up to expectations even during the year-end party season. Overall hypermarket sales dropped 5 percent in the first two months of 2006, which means that total sales fell by about NT$500 million (US$15.6 million).

More specifically, private consumption in Taiwan is now expected to grow by only 2.96 percent in 2006, down from 3.91 percent in 2004. This will be the lowest figure in three years, according to the government's Directorate General of Budget, Accounting and Statistics. The slowdown in consumption growth is attributed to a reduction in real pay and to price hikes, which is cased by soaring oil prices worldwide.

However, the most director factor that has been putting pressure on consumption appears to be the card-debt turmoil that erupted in the second half of 2005.

Government statistics show that in 2005, credit-card consumption grew by 13.3 percent to a total of NT$1.42 trillion (US$44.4 billion), accounting for 20.5 percent of all private consumption. This means that one out of every five dollars of consumption in Taiwan was carried out via credit card. The ratio of card consumption even reached 80 percent at department stores.

It now appears that card-debt problems are having a very heavy impact on private consumption. It is estimated that credit card debts will cut private consumption in Taiwan by NT$20 billion (US$625 million) per year and take 0.15 percent off the nation's economic growth rate.

This article provides a detailed analysis on how card-debt problems are affecting private consumption in Taiwan. It argues that seven or eight years ago, Taiwan's private consumption was continuing to expand at a rate of over 6 percent - and contributing more than 3 percent to the nation's economic growth rate. However, in 2006, private consumption is expected to drop to only 1.71 percent. This will make it difficult for Taiwan to keep its economic growth rate above 4 percent in 2006 because private consumption accounts for 60 percent of the nation's gross domestic product (GDP).

Some analysts think that card-debt problems, together with other adverse factors such as high oil prices and increased business costs caused by Taiwan's new labor pension system, will affect Taiwan's economic growth rate in 2006. The government will have to adjust its economic growth forecast downward for the year.

Other experts disagree. They argue that the ratio of card debts to total private consumption is still quite low. Nonetheless, they predict that it will take about a year for Taiwan's economy to get over the card-debt problem.

According to this article, inflation will be another critical factor in Taiwan's economic growth. If commodity prices continue to rice, then interest rates will increase as well. This will prolong the time needed to resolve the card-debt problem. In other words, as long as prices remain stable in the second half of 2006, private consumption should not be a serious problem. An increase in business investment will also stimulate private consumption, which in turn will boost employment and give rise to a good economic cycle.

Nonetheless, if interest rates continue to rise, their effects may spread to the real estate market and set off an economic chain reaction that drags down Taiwan's economic growth rate. In this regard, the government needs to be careful in its attempt to adjust the scale and timing of utility and gasoline prices, in order to avoid further worsening of the problem.