Taiwan Economic Slump Probably Eased on China Demand

By Janet Ong and Jay Wang

Nov. 26 (Bloomberg) -- Taiwan’s economy contracted at the slowest pace in a year in the third quarter as Chinese demand for the island’s products spurred a recovery, economists say.

Gross domestic product shrank 2.6 percent in the three months through September, according to the median estimate of 17 economists in a Bloomberg News survey, after contracting 7.54 percent in the second quarter. The government will announce the figures at about 5 p.m. in Taipei.

Signs of recovery have prompted employers to start hiring, with Taiwan’s unemployment rate falling in October for the first time in more than a year, and companies including Taiwan Semiconductor Manufacturing Corp. forecasting better sales. The benchmark Taiex index has climbed 69 percent in 2009 as investors bet the island’s economy is past the worst.

“In the third quarter, export growth was mainly due to increased orders from China,” said Ma Tieying, an economist at DBS Group Holdings Ltd. in Singapore, who forecast the economy shrank 3.2 percent. “In the current quarter, exports to the U.S. are picking up and domestic consumption and higher employment levels are signs of a recovery.”

Taiwan is dependent on a revival of overseas sales, which account for more than two-thirds of the economy, to recover from its yearlong recession. Export orders, an indication of shipments in the next one to three months, climbed in October for the first time in 13 months, led by demand from China and Hong Kong.

Stocks, Currency

Taiwan’s currency climbed 0.2 percent to NT$32.183 against the U.S. dollar as of 10 a.m. local time, according to Taipei Forex Inc. It reached a one-year high of NT$31.995 on Oct. 1. The U.S. dollar has dropped against all 16 major currencies tracked by Bloomberg this year. The benchmark Taiex index gained 0.3 percent.

President Ma Ying-jeou’s administration plans NT$858.5 ($26.6 billion) of spending over four years, or about 6 percent of GDP, on infrastructure, consumer grants and tax cuts to revive the economy. It handed out NT$82.9 billion of shopping vouchers in January, which the island’s statistics bureau says added 0.66 percentage point to GDP.

The central bank in September kept interest rates unchanged at a record-low 1.25 percent. Governor Perng Fai-nan has cut rates by 2.125 percentage points since Sept. 25, 2008.

The central bank is likely to keep interest rates unchanged this year as the risk of inflation is limited, DBS’s Ma said. She expects the central bank to increase borrowing costs in the second half of next year, once economic growth returns to pre- crisis levels.

Exports to China

Taiwan’s exports to China, its biggest overseas market, rose 10.6 percent in October from a year earlier, after increasing 2.1 percent in September. Total exports fell 4.7 percent last month, after a 12.7 percent slump in September.

Taiwan’s electronics producers send parts to China that are re-exported as finished computers, televisions and mobile phones to consumers in the U.S. and Europe.

China’s economy expanded 8.9 percent last quarter from a year earlier, the fastest pace in a year, spurring sales for Taiwan electronics makers including Quanta Computer Inc., the world’s largest maker of notebook computers.

Taiwan Semiconductor, the world’s largest custom chipmaker, reported third-quarter sales rose 21.2 percent from the previous quarter to NT$89.9 billion, boosted by overseas demand.

“Demand from the U.S. lags China as the economic recovery in the U.S. remains sluggish,” said Tony Phoo, a Taipei-based economist at Standard Chartered Plc. He forecast a 2.6 percent contraction in GDP in the third quarter.

Financial Accord

The signing of a financial accord between China and Taiwan may boost investors’ confidence as it will pave the way for increased cross-strait trade and services cooperation, Phoo said.

China and Taiwan on Nov. 16 signed three memorandums of understanding to ease access to each other’s banks, securities and insurance industries as cross-strait relations reached their warmest in 60 years.

Taiwan was struck by its deadliest storm in 50 years in August, causing NT$110 billion of damage. The statistics bureau said on Aug. 20 that Typhoon Morakot would reduce growth by between 0.6 and 0.7 percentage point in the three months ended Sept. 30 and between 0.1 and 0.2 percentage point in the fourth quarter.

To contact the reporters on this story: Janet Ong in Taipei at jong3@bloomberg.net; To contact the reporter on this story: Jay Wang in Singapore at jwang298@bloomberg.net