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Cablegate: Taiwan's Growth Continues Slowing

This record is a partial extract of the original cable. The full text of the original cable is not available.

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

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