In line with Chinese footprints on global exports, Standard & Poor’s (S&P) Ratings Services recently lowered its economic growth for Taiwan, cutting its GDP forecast to 1.9 per cent from a previous estimate of 2.4 per cent, the agency attributing its latest downward revision to a slowdown in China.

Taiwan and China

S&P said the downward forecast reflects the fall in Taiwanese exports. The results suggest that gross domestic product in Taiwan decreased by nine-tenth’s of a percent for every 1 per cent of deceleration in investment growth in China.

Due to the economic slowdown in China, Taiwan is affected by weak shipment volumes, also forcing it to downgrade its GDP forecast for 2012 to 2.1 percent from 3 percent, as export growth forecast was slashed to 0.1 percent from 2.7 percent. Taiwan’s economy unexpectedly contracted in the second quarter of 2012 by 0.2 percent from the same period a year earlier. For instance, Taiwan was hit by a fifth consecutive month of export decline in July, representing a 4.4 per cent year-on-year drop after a June 26% dip.

The export sector is the engine of Taiwan’s economy, accounting for 66% of its gross domestic product, so the drop in exports to China is very significant. The mainland is the biggest export destination for Taiwan, accounting for 27 percent of overall shipments.

When it comes to tourism, mainland traffic had continued to grow, especially in Hong Kong and Taiwan. But year-over-year retail sales volume and value growth in Taiwan fell in the most recent months, according to the IMF.

The reports on unemployment and commercial sales for September reaffirmed that Taiwan domestic activities are in a slowing phase. Taiwan’s seasonally-adjusted unemployment rate rose above 4 percent for the first time since 2005, hitting 4.12 percent.

Although this still seems modest against the 3.93 percent unemployment rate trend in the past three years, it is another compelling signal of the state of the underlying economy and the impending slowdown. The headline jobless rate rose to a new three-year high of 4.27 percent, where the drop in labor supply following the summer season also contributed to the higher rate.

Taiwan’s dollar fell earlier in the year, after officials said Chinese export orders and industrial production shrank in April, amid warnings of continued soft global demand. Total export was down between January and August, while imports fell 4.1% in the same period, said Amelia Day, a Taiwan foreign trade official.

Given that inflationary pressures have been weakening since peaking in July, the Taiwan central bank has more room to ease its monetary policy in response to the economic slowdown and weakening domestic demand. Chinese Daily experts think the Taiwan central bank is likely to lower rates again in December.

Many criticize Taiwan for the close economic relationship it developed with China, calling for diversification of investment to emerging economies such as Brazil, Mexico, Chile, and Peru. They called on the government to speed up development on the issue, saying the space for cooperation is very broad.

Mexico, however, is the first recipient of Taiwanese investment in the Latin American region, while there is talk about the establishment of a technology park costing 12 billion dollars near the city of Sao Paulo in Brazil.

Whether this will succeed in rejuvenating the Taiwanese economy is another matter altogether.