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Although the year got off to a promising start with new prospects of better relations with the mainland China and the implementation of economic reforms after Ma Ying-jeou took office as president in May, Taiwan has since succumbed to weaknesses facing the global economy.
The year promised much in terms of Taiwan's relations with the mainland, with Ma having campaigned strongly on a platform of opening up direct air links with China, easing investments restrictions on local companies seeking to buy into the burgeoning Chinese economy and amending legislation to allow firms from China to invest in Taiwan.
While these measures have been put in place, they have had less than the desired effect due to the impact of the global economic downturn. In fact, Taiwan's export-driven economy could be in for hard times next year, after shifting into reverse gear in the last few months of 2008 as the global financial crisis started to unfold.
According to official statistics, the economy grew at a rate of 6.25% in the first quarter and 4.56% in the second, before contracting 1.02% in the third. The fourth quarter looks even bleaker, with a report issued by the state statistics bureau in late November showing that export orders fell for the first time in six years in October, while industrial output dropped by 13% and energy demand was down 15%.
In December, asset management consultancy UBS AG downgraded its outlook, saying Gross Domestic Product (GDP) growth would contract by 1.6% in 2009, rather than the increase of 1.7% it had initially predicted.
Faced with risks of a further downturn to the domestic economy amid the ongoing global financial turmoil, the central bank did cut its benchmark interest rates on December 11 by a 0.75 percentage points to 2% - the fifth cut in less than two months and the largest in 26 years - to allow the Taiwanese dollar to depreciate against foreign currencies to help stimulate domestic demand and exports.
The government has been working hard to stave off the worst effects of the global crisis. Firs of all, it is pushing local banks to extend mortgage payment periods to ease pressures in the property markets. Secondly, it increased tax deduction entitlements for families and finally looked at plans to either provide loans or take up stakes in troubled Dynamic Random Access Memory (DRAM) companies.
The worldwide economic downturn has hit Taiwan's electronics sector especially hard, with a number of leading local semiconductor companies laying off staff, cutting costs and lowering year-end profit predictions. MediaTek Inc, Taiwan's largest handset chipmaker, warned in early December that its fourth quarter earnings could fall by 30% compared to the previous three months, While AU and Chi Mei, Taiwan's two largest LCD makers, both issued statements saying they expected sales to fall by between 30 and 45% in the final quarter.
On December 8, the Taipei Times reported that lay offs by technology firms operating out of the Hsinchu Science Park have accelerated, with more than 500 workers being dismissed in November, taking to 2477 the number of positions lost in the first 11 months of the year. Across the economy, unemployment is on the rise, with 468,000 or 4.3% of the workforce jobless at the end of October, the highest level since the beginning of 2005 according to state figures.
A bright spot for the Taiwanese economy is year-end inflation, which is expected to come in at around 2%, dropping to just 1% in 2009, according to a poll of economists conducted by the Reuters news agency at the beginning of December. Meanwhile Taiwan's trade surplus could actually increase despite lower export levels in the coming year, due to falling energy and commodities prices.
Another encouraging item in the new-year could be the news that the Chinese government plans to boost deficit spending to help spur production on the mainland. In early December, Beijing announced it was considering increasing its fiscal deficit next year by 56% to buttress economic growth. This followed on from a $586bn stimulus package announced in November.
With China being one of Taiwan's major trading partners, and with many Taiwanese firms operating across the Strait of Formosa, any effort to boost demand on the mainland would be welcome, especially given Taiwan's exports to China fell by a massive 38.5% in November.
Recovery in Taiwan will be heavily dependent on external factors, with the health of the economies of its major trading partners such as the US and China playing a leading role in determining how quickly exports revive and the local economy gets back into the black.