Wednesday, April 22, 2009

The Economy has Yet to Recover, the Government must Redouble Its Efforts

The Economy has Yet to Recover, the Government must Redouble Its Efforts
United Daily News editorial (Taipei, Taiwan, ROC)
A Translation
April 22, 2009

Next week the government will announce several March economic indicators. Barring unforeseen circumstances, the numbers will be generally be better than February, but worse than March last year. The exception may be the unemployment rate. But the government's financial and economic officials have already announced that "spring is here and the swallows have returned." The government's intention is obvious. It hopes to create a self-fulfilling prophecy. It hopes to use a slowing decline to inspire public confidence, and to ignite the flames of an economic recovery. But after a wild ride, the economy remains shakey. It is easy to make a bad judgment call. At the moment the market is still seeking the bottom. It is s much too early to talk of a recovery. Doing so may lead to a loss in vigilance, causing the economy to undergo additional cycles, making governance even more difficult.

Pitfalls await anyone attempting to analyze today's economy. The first pitfall is the stock market. The Taiex rose sharply following the Lunar New Year. Last Thursday the Taiex approached the 6000 mark, a level unseen since September 15 last year, when the financial tsunami struck. On Friday trading volume exploded. Since February trade volume has increased 35% percent. The stock market is reacting to future expections. It is viewed a key economic indicators. The wealth effect brought about by rising stocks will increase consumption and investment, in a virtuous circle. This is indeed one possible sign of economic rejuvenation. We may be experiencing a rebound or zero interest rate environment beneficial to the performance of the stock market. But the stock market is more and more like the stock market last May. The easing of cross-Strait relations offered hope for a peace dividend. The index peaked on the May 20 anniversary of the presidential inauguration last year, only to plummet afterwards. Investors need to keep a cool head.

The second trap is statistics. Officials often use these to mislead the public. For example, the current spin is "March is better than February." This involves claims that over the counter sales, stock market trade volume, and domestic exports have improved from one month to the next. But March had 10% more working days than February. Of course the numbers increased. Most analyses compare any period with the same period last year, usually a minimum of three months. One must not jump to conclusions based on monthly data. The indicators released this week include export orders, industrial production, unemployment rate, and money supply. No surprises are expected this month. But if added to the previous two months, they may be a better indicator.

The choice of indicators is also a trap that may affect judgments about the impact of various factors upon the economy. The key indicators government heads use when they say spring is here and the swallows have returned, include the stock index and export figures. The third, indicator, which was unmentioned, is consumer spending. Take exports. The rate of decline in March clearly slowed. But the first quarter decline was worse than expected. It is hard to interpret this as recovery in exports. Also, Taiwan re-exports much of what it imports. Import figures, especially the leading indicators for agricultural and industrial raw materials, show no improvement in export momentum. This is true even if one factors in falling imports and oil prices during the first quarter.

Among the seven leading indicators prepared by the CEPD, only the money supply increased. This was one of the results of a loose monetary policy. But another leading indicator, housing construction permits, calculated by area, fell three months in a row. It is currently less than half of what it was when the financial tsunami struck. As for the labor market, the figure for overtime hours per month is even lower. Industry has yet to stabilize. The remaining indicators were good in one month, bad in the next, indicating bottom-seeking. These indicators show that the economy is still at the bottom struggling to move up. For government heads to claim that spring is here and the swallows have returned is truly premature.

The business cycle must go through certain phases, especially following the major damage caused by the decline from the previous peak. The financial system was on the verge of collapse, rapidly increasing the ranks of the unemployed. Businesses were forced to close due to supply chain production shortfalls. These are among the challenges the economy must face while clawing its way back from the bottom. It is both difficult and time-consuming. Therefore one must not be so naive as to assume that as the economy falls, so it will rise. It is unlikely to recover as quickly as it fell during the SARS crisis. If one is careless, one may find oneself at the bottom again. Another lesson of this recession is that the Internet and globalization have accelerated the business cycle. Only businesses that can respond swiftly can survive. This is true for governments as well. Therefore, the government should not be in a hurry to turn in a report card. Instead it should intensify specific measures to revive the economy. This is the right way to ensure a steady recovery when one is at the bottom.

What shape will Taiwan's economic recovery take? Will it be a stable U-shaped recovery? Will it be a W-shaped recovery with a second dip? Or will it be an L-shaped long-term recession? The answer is uncertain, and the government must not take matters lightly.

2009.04.20 02:02 am








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