Taiwan's Economy Expands at Slowest Pace in a Year

By Janet Ong and Chinmei Sung

Aug. 22 (Bloomberg) -- Taiwan's economy grew at the slowest pace in more than a year last quarter as consumer spending cooled and U.S. customers bought fewer laptops, flat-screen televisions and mobile phones.

Gross domestic product rose 4.32 percent from a year ago, down from the first quarter's 6.25 percent gain and less than the median estimate of 4.54 percent in a Bloomberg survey of 14 economists. The statistics bureau today cut its 2008 growth forecast to 4.3 percent from 4.78 percent three months ago.

The report adds to signs that Asia's economies are being hurt by the global economic slowdown, and by soaring fuel and food prices. Easing U.S. demand has cooled sales for Acer Inc. and Taiwan Semiconductor Manufacturing Co., while Marks & Spencer Group Plc said it will close three Taiwan stores as rising living costs damp spending by the island's consumers.

``Downside risks have intensified, and the economy will likely continue decelerating in the second half,'' said Cheng Cheng-mount, chief economist in Taipei for Citigroup Inc. ``We expect policy makers to shift focus from upside inflation risk to downside growth risk in the second half.''

Providing fresh evidence of faltering global growth, the U.K. economy unexpectedly stagnated in the second quarter and European industrial orders fell the most in more than six years in June, reports today showed.

Taiwan's GDP data were released after the close of trading on the stock exchange. The Taiex Index fell 0.1 percent to 6,911.64, its lowest since Aug. 5. The benchmark index slumped 12 percent in the second quarter, the biggest decline in almost six years. The island's dollar dropped for a fifth straight week.

Growth Forecasts

Taiwan's economy will expand 3.04 percent in the third quarter from a year earlier, which would be the weakest pace since the first three months of 2005, the statistics bureau forecast today. Growth will be 3.75 percent in the fourth quarter, it said.

``The economy is facing growing headwinds and will slow sharply over the rest of this year,'' Rob Subbaraman, chief Asia economist at Lehman Brothers Holdings Inc. in Hong Kong, wrote in a report. ``There are growing signs of weakness in the tech sector, the linchpin of the economy. Consumption is weakening.''

Taiwan follows South Korea, Singapore and Japan in reporting a deteriorating economy because of faltering demand in the U.S., the region's largest overseas market.

Japan's economy, Asia's largest, shrank in the second quarter by the most since 2001. Singapore posted the weakest growth in five years and South Korea's economy expanded at the slowest rate in more than a year.

Global, Local Demand

Taiwan Semiconductor, the world's largest custom-chip maker, and computer maker Acer both reported slower sales in the U.S. in the second quarter. Exports are equivalent to about 50 percent of the island's GDP.

As global demand eases, rising living costs and declining share prices have damped confidence and discouraged Taiwanese consumers from spending. Retail sales fell 0.4 percent in June from a year earlier, the first decline since January 2007.

The Taiwan government in July announced subsidies for low- income families to alleviate the impact of rising prices and help bolster domestic demand.

Marks & Spencer last month said it will shut three Taiwan stores it runs with President Chain Store Corp., less than 18 months after the U.K.'s largest clothing retailer entered the market.

Inflation Accelerates

``Consumers were spending less in the second quarter as incomes couldn't keep up with the cost of living,'' Fang Wenyen, an economist at KGI Securities Co. in Taipei, said before the announcement. ``People cut back on consumption as the stock market declined and inflation pushed up prices.''

Inflation accelerated to 4.97 percent in June, the fastest pace in eight months, as fuel and food costs climbed.

Taiwan's statistics bureau raised its forecast for consumer-price inflation over 2008 to 3.74 percent from 3.29 percent. It estimates inflation will be 1.91 percent next year.

The island's central bank raised its benchmark interest rate to a seven-year high of 3.625 percent on June 26 to help damp inflation. That marked the 16th consecutive quarterly increase in borrowing costs.

Citibank's Cheng forecasts the central bank will raise its rate by 12.5 basis points in September and that will be the last increase for the year as policy makers shift their attention to the slowing economy.

To contact the reporters on this story: Janet Ong in Taipei at jong3@bloomberg.net; Chinmei Sung in Taipei at csung4@bloomberg.net.