Alive in the bitter sea (Part 3):Uncertainty is all around…compounded by a months-long

political limbo at home

Taiwan Business Leaders’ Forum

25 February 2016

From the FT: an uncertain USAExtracts from the January meeting of the US Federal ReserveThe central bank’s minutes for its January meeting released on Wednesday showed that Fed policymakers were wary of rushing to premature conclusions about the implications of the month’s financial turbulence, but most agreed that the outlook had become more clouded and uncertain.

Participants judged that the overall implication of these developments for the outlook for domestic economic activity was unclear, but they agreed that uncertainty had increased and many saw these developments as increasing the downside risks to the outlook, the minutes showed.

The uncertainties in markets have been such that the Fed in January unusually declined to offer a view on how the risks to the outlook measure up. Among the reasons for optimism about the US economy are the persistently strong job gains, with the jobless rate now at just 4.9 per cent, less than half its crisis-era peak.

China was isolated as a key factor in Ms Yellen’s testimony, as she argued that while growth did not appear to be slowing sharply, declines in the value of the Chinese currency had “intensified uncertainty about China’s exchange rate policy and the prospects for its economy”. Source: The Financial Times

A new – and uncertain – form of stimulus

Broadly speaking, the economic theory is that negative [interest] rates encourage banks to lend money more cheaply and savers to spend more freely, while discouraging overseas money from flowing in and pushing currencies lower.

Sweden, Switzerland, Denmark, the eurozone and most recently Japan — adding up to almost a quarter of the global economy — have all introduced some form of negative interest rate policy in an attempt to fight deflationary forces, weaken their currencies and stimulate growth.

Some analysts believe the Federal Reserve will have to follow suit despite its move to raise rates in December for the first time since 2006. Janet Yellen, the US central bank’s chair, has admitted that policymakers have at least considered the possibility.

Source: Financial Times

A new – and uncertain – form of stimulus

Source: Financial Times

No joy from the Markit version of January’s PMI…

• Manufacturing PMI fell to 50.6 in January (from 51.7 in December 2015).

• Production, new orders and employment all increased – but at a slower pace.

• New export orders fell slightly

• Reports suggest that increased market competition and greater bargaining power among clients had led companies to cut their prices

Source: Markit Economics

…or from the NDC’s take on it for December 2015

Overall it’s caution and contraction – but not collapseManufacturing PMI rose by 1.5 to 46.6, from 45.1 in November 2015 – the 6th straight month of contraction, i.e. below 50.

• Production at 48.9 and New Orders at 45.7 showed small increase from November.

• Employment rose slightly to 48.9 from November’s 40-month low of 45.7

• Prices fell 6.5 points to a low of 28.3 – 16 months of decline

• Inventories are still being run down – at 44.1 lower by 2.4 from November

• Export 43.8 and Import 41.6 indices lost ground

• 5/6 industry groups again contracted to 42.5 – 49.5. Foods & Textiles up to 53.9

• Source: National Development Council

…or from the NDC’s take on it for December 2015…

…industry by industry

What the NDC says, in full

Source: National Development Council

Progressive decline through the year in 2015

…but inching upwards in December

…with some gains among industry sectors

How the manufacturing PMI is compiled

How the NMI is compiled…

…and the constituent industries are categorized

Will the government’s stimulus package help?...

BMI – This modest stimulus will have little impact on growth and the fiscal position“Government’s modest stimulus package aimed at supporting growth through boosting domestic spending will have a limited effect on the country's growth, which will continue to be hampered by stiff export headwinds as well as domestic political uncertainty.

As such, we maintain our real GDP forecasts for 2015 and 2016 to come in at muted levels of 1.0% and 1.9%, respectively.

The size of the package – USD123m - is also unlikely to have a significant impact on the 2016 fiscal deficit, which we forecast to come in at 1.6% of GDP.”

…likely only a little.

Although the government expects these measures to add TWD1.54bn (USD47.5mn) to GDP…the effect of these measures is likely to be marginal, as they fail to address the root causes of Taiwan's growth woes.

And what are these stimulus measures? Subsidies for…

• Purchasing energy-efficient household appliances

• Upgrading 2G mobile phones to 4G smartphones

• Domestic tourism

Not much to cheer about globally, either BMI Research

GDP forecasts

• Taiwan is entering a mild recovery in 2013 due to better global demand, but faces long-term challenges

• The relocation of manufacturing to China has plateaued at 50% on the Overseas Production Ration as local firms feared poor IP protection for high value-added componentry in China.

A rapidly ageing population also slows the consumer outlook

The relative importance of local and foreign demand

Taiwan still exhibits a positive country risk profile

The BMI Economic Risk Index shows that…

Taiwan's Short-Term Economic Risk score is 83.5, with the principal weakness found in the 'growth' sub-component due to Taiwan's reliance on its export sector. Key strengths stem from the 'external' and 'financial‘ fronts, with the former buttressed by the country's accumulation of a sizeable foreign exchange reserve buffer.

But the cloud for that silver lining is that…

Taiwan's trade growth is increasingly dependent upon the health of the Chinese economy and domestic policymakers are therefore less able to effectively manage the economy. And an unfavourable demographic outlook – low birth rate, ageing population - is likely to exert strain on the fiscal accounts over the coming decades.

BMI country risk short/long-term regional rankings

The global economy is in its “new mediocre” phase

Except for a few outliers, the world’s significant economies have entered a period of muted growth

The ‘new mediocre’ is a global situation

From the Financial Times October 6, 2015http://www.ft.com/intl/cms/s/0/ed5db834-6c01-11e5-8171-ba1968cf791a.html??ftcamp=crm/email//nbe/FirstFTEurope/product#axzz3njdsdN7T

IMF warns on worst global growth since financial crisis

• The fund has cut the global growth forecast for 2015 from 3.5 % in April to 3.1 %

with a gradual recovery in the years ahead as it expects the faster growing emerging

economies to recover and continue to account for the lion’s share of global

expansion.

• There was not one specific cause of the global economic weakness, the IMF said,

although the slowdown in China and its realignment towards consumption and

services compounded pain for countries which export oil and metals.

• Instead, the fund said the weakness reflected common longer-term forces slowing

the potential for growth in many countries, including lower productivity growth,

high public and private debt levels, ageing populations and a hangover from post-

crisis investment booms in many emerging economies.

The ‘new mediocre’ is a patchwork

Growth in emerging markets and developing economies is projected to fall from 4.6% in

2014 to 4.2% this year - primarily reflecting weaker prospects for some large emerging

market economies, commodities exporters and major oil producers.

• North America: US Q1 fell short but conditions for sustained growth of 2.5%-plus

in the full year remain in place – Canada and Mexico benefit through NAFTA.

• EU: With exceptions (Greece), growth is back - driven by exports (UK, Poland),

domestic demand and inflation – and reaching for 1.6% overall.

• Asia: India and ASEAN/6 strong (for now) at 5-7% growth; China slowing to 6.8%;

Japan marginal at 0.5%; developing Asia 6.6%

• S. America: Flatlining overall, Mexico 2.4%, Brazil negative

• Mid-East, AfricaModerate at 2.5% - hit by oil price; Sub-Saharan Africa stronger at

4-6% but off low base; South Africa disappoints at 2.0%