US embassy cable - 05TAIPEI1560

UNCLAS SECTION 01 OF 03 TAIPEI 001560 
 
SIPDIS 
 
STATE PLEASE PASS AIT/W AND USTR 
 
STATE FOR EAP/RSP/TC, EAP/EP AND EB/IFD/OIA 
 
USTR FOR SCOTT KI 
 
USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER 
USDOC FOR 3132/USFCS/OIO/EAP/ADAVENPORT 
 
TREASURY FOR OASIA/ZELIKOW AND WISNER 
 
TREASURY PLEASE PASS TO OCC/AMCMAHON 
 
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF 
GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN 
 
E.O. 12958: N/A 
TAGS: EINV, EFIN, ECON, PINR, TW 
SUBJECT: Taiwan's Growth Continues Slowing 
 
SUMMARY 
------- 
 
1.  The slowing trend of Taiwan's economic growth has 
continued from the second half of 2004 into the first two 
months of 2005.  Export growth has declined steadily. 
Industrial production has gone from growth to decline, while 
unemployment has edged-up for the first time in the past 
seven months.  Higher prices of crude oil and other raw 
materials from abroad have brought inflationary pressure, 
prompting Taiwan's Central Bank of China (CBC) to raise 
interest rates.  Economists have mixed expectations for 
Taiwan's 2005 economic performance, but a growing number 
anticipate the economy will continue to slow into 2006 due 
to currency appreciation and higher interest rates.  END 
SUMMARY. 
 
Economic Slowdown 
----------------- 
 
2.  In 2004, Taiwan's economic growth dropped from 7.3% in 
the first half of the year to 4.7% in the second half. 
Although Taiwan's Directorate General of Budget, Accounting 
and Statistics predicts the growth rate will stay above 4.5% 
throughout 2005, economic think tanks are less optimistic. 
The Chunghua Institution for Economic Research predicts 
growth rates will continue declining to barely above 4% in 
the second half of 2005.  A leading indicator of economic 
growth compiled by the Council for Economic Planning and 
Development (CEPD) posted its fifth straight monthly decline 
in February 2005, down 1.3% compared to the previous month. 
The manufacturing facility utilization rate fell to 77%, the 
lowest in the past two years.  Profits as a share of sales 
dropped to 4.6%, lowest in the past 18 months. 
 
3.  Trade and production figures also indicate economic 
slowdown.  Taiwan's export growth on a y-o-y basis slipped 
from 29% in Q2 of 2004 to 8% in the first two months of 
2005, while import growth dropped from 40% to 11%. 
Industrial production in the first two months of 2005 
declined 0.5% from a year ago, compared to a growth rate of 
14% for Q1 and 15% for Q2 of 2004.  Capital- and technology- 
intensive industries, the backbone of Taiwan's industrial 
sector, declined 0.2% in the first two months of 2005, 
compared with growth of 15-16% in early 2004. 
 
Rise in Unemployment 
-------------------- 
 
4.  Unemployment rose for the first time in seven months. 
Taiwan's unemployment rate in February 2005 was 4.28%, the 
highest since November 2004.  Nevertheless, unemployment is 
still lower than the 4.61% of a year ago.  About 55% of 
jobless persons are in the 25-44 age bracket. 
 
Inflationary Pressure Leads to Higher Interest Rates 
--------------------------------------------- ------- 
 
5.  Higher petroleum and other raw material prices raised 
Taiwan's consumer price index in February 2004 to 1.94%, 
higher than the average interest rate of 1.2% for overnight 
call loans.  The negative real interest rates prevailing in 
eight of the past nine months prompted the CBC to raise 
interest rates by 0.125 percentage points on March 25.  The 
discount rate rose from 1.75% to 1.875%, still lower than 
the U.S. Federal Reserve Board's benchmark Federal Funds 
interest rate.  David Hong, Acting President of the Taiwan 
Institute of Economic Research (TIER), said that he expects 
the CBC will continue to raise interest rates as long as 
interest rates in the United States are higher than in 
Taiwan.  On March 22, the U.S. Federal Reserve Board raised 
its benchmark interest rate by 0.25 percentage points to 
2.75%. 
 
Growing Optimism in Business Community 
-------------------------------------- 
 
6.  In spite of the economic slowdown, Taiwan's business 
sector is optimistic.  According to a TIER survey done in 
March 2005, 55% of respondents expected better business 
performance in the next six months, up from 27% in February. 
The share of business people anticipating declining 
performance dropped from 18% to 8.5%.  A survey conducted by 
the Council for Economic Planning and Development (CEPD) 
produced a similar result. 
 
Economists' Mixed Expectation 
----------------------------- 
 
7.  Economists have mixed expectations for Taiwan's economic 
performance in 2005.  TIER senior economist Chen Miao told 
AIT that the government's industrial development program and 
public construction projects would stimulate economic 
expansion in the second half of this year.  In March 2005, 
the Executive Yuan (EY) approved an eight-year flood control 
project costing NT$80 billion.  The EY has also recently 
decided to offer incentives for emerging industries, such as 
flat panel (TFT-LCD) and biotech products.  TIER's Chen Miao 
expected the NT dollar (NTD) to continue to appreciate this 
year.  The Chunghua Institute of Economic Research (CIER) 
predicted Taiwan's economy will turn up in the last quarter 
of 2005.  Dr. Chou Chi, Director of the CIER's Economic 
Forecasting Center, told AIT he expected the better economic 
performance to continue into 2006. 
 
8.  However, Ho Chi-wen, President of Morgan Stanley 
(Taiwan), and Chu Yun-pen, Director of National Central 
University's Taiwan Economic Center, are pessimistic about 
Taiwan's economy.  In a recent seminar sponsored by the 
Monte Jade Science & Technology Association of Taiwan, both 
of them forecast that Taiwan's investment expansion and 
economic growth in 2005 will slow significantly because 
higher interest rates will dampen consumption in the United 
States, an important export market.  Morgan Stanley's Ho Chi- 
wen indicated that the slowdown in Taiwan's 2005 economic 
growth is also caused by saturation of global demand for 
information & technology (IT) products.  Production will 
increase, but competition will drive down prices and squeeze 
profit margins.  According to Ho, Taiwan's economic growth 
in 2005 and 2006 must rely on increases in private 
consumption, which has posted an annual growth rate of 3% or 
less over the past four years. 
 
9.  See tables on our AIT/T/Econ Intranet website for latest 
economic indicators: 
http://taipei.state.gov/ait_s/econ/econ_web/e conhome.htm 
PAAL