Private consumption seen to be on the wane despite higher economic forecast

This article was published by the Taiwan Headlines on May 19, 2006. It reports that the government's Directorate General of Budget, Accounting and Statistics recently revised its forecast of Taiwan's economic growth in 2006. The growth rate was slightly adjusted upward to 4.31 percent.

The government agency decided to revise the growth rates of Taiwan's gross domestic product (GDP) for 2006, because of the optimism of economic institutions worldwide about the global economy. It was also because of the upturn in the economic performances of Taiwan's major trade partners such as Japan, the United States and the European Union.

Specifically, according to the Directorate General of Budget, Accounting and Statistics, the performance of Taiwan's economy in the second quarter of 2006 is likely to be better than expected; it may even rival that in the first quarter. But the nation's economic growth is likely to decline in the third quarter, and may even reach as low as 3.24 percent in the fourth quarter of 2006.

However, other experts pointed out that domestic demand in 2006 might be weaker than expected. This is because non-foodstuff consumption is likely to shrink as a result of the spreading credit-card debt problem and the lack of major domestic investment projects (apart from those in the semiconductor industry).

Nonetheless, according to the Directorate General of Budget, Accounting and Statistics, most major countries around the world are not pessimistic about their economic development. Market observers predict that the growth rate of the global economy will hit 3.8 percent in 2006, up from the original forecast of 3.5 percent. The forecast for economic growth of the United State remains unchanged, while that for the European Union rises only slightly. Furthermore, while the forecast for China's economy remains at a high level, that for the Japanese economy is expected to increase significantly.

Finally, in its new forecast, the Directorate General of Budget, Accounting and Statistics raised the forecast growth of private investments in 2006 to 3.6 percent, from the original 2.4 percent, thanks to the upturn of the global economy.

However, the government agency's forecast for the growth of private consumption dropped to 2.54 percent, down from the original 2.96 percent. It is the lowest level in the past three years. The weaker private consumption will inevitably slows down Taiwan's economic growth, because it accounts for 70 percent of the nation's GDP.

Other experts agreed. They pointed out that in the first quarter of 2006, the people in Taiwan had already cut their spending on non-essential non-foodstuff products, which led to sales declines in apparel and autos. For example, in the first quarter of 2006, auto sales plunged 27 percent. Meanwhile, spending on household management, including outlays for foreign caretakers, increased 7 percent. This means that there was less cash available for private consumption.

Nonetheless, some economists argued that despite the aforementioned slight increase in the forecast made by the Directorate General of Budget, Accounting and Statistics, Taiwan's economic growth in 2006 is likely to be the lowest among major Asian economics, except Japan. According to these economists, Taiwan's economy is likely to grow only 3.7 percent in 2006, even lower than the growth rates of Indonesia and the Philippines.

According to these economists, in the first quarter of 2006, the credit-card debt problem had already dragged down private consumption by one percent and GDP growth by 0.6 percent. Because card debt will alter consumption behavior, its effect on GDP in the second quarter of 2006 may be much larger than the 0.2 percent predicted by the government.