Taiwan's latest data releases confirm that the economy is heading toward a recession comparable to or worse than that of 2001. Though driven mainly by the collapse in export volumes, the drop in economic growth has been propelled as well by cooling private consumption and investment.

1. Taiwan's economy contracted by 1.02 percent year-on-year (yoy) in the third quarter, a big drop from the 4.56 percent yoy increase recorded in the previous quarter.

2. Taiwan's exports declined in both September and October, which was unusual and was also the reason for the negative GDP growth in the third quarter.

3. October export orders fell sharply by 5.56 percent yoy, compared with a 2.82 percent yoy rise in September.

4. Taiwan's seasonally-adjusted unemployment rate rose nearly 2 percentage points again to 4.29 percent in October, compared with 4.12 percent in September. Real average earnings fell 3.1 percent yoy, to a nominal NT$37,091 (just over $1,110).

5. Private consumption plummeted in the third quarter to -1.09 percent of GDP from 0.27 percent in the second quarter, even though the inflation rate dropped from a peak of 5.81 percent in July to 2.39 percent in October.

For the fourth quarter in 2008, despite the boost in consumer purchasing power from lower consumer prices, private consumption remains under pressure with the job market deteriorating, the housing market slowing, the credit market tightening and equity markets continuing their downward correction.

Amid the global industrial downturn, high inventory levels and low utilization rates weigh on private investment. On the trade front, we expect fourth-quarter exports to contract as many advanced economies are set to post negative growth. Chilly demand domestically and externally suggests GDP should continue to trend down in the final quarter of the year. A back-to-back decline indicates Taiwan is heading into a recession.

Next year, the global economic conditions will worsen. To keep GDP growth from staying in negative territory in 2009, the Taiwan authorities have proposed a stimulus package to protect economic growth. More favorable policies are on the cards.

However, we remain conservative about the actual effect. We expect a more aggressive policy response ahead.

Global financial turmoil increases the depth and length of the economic slowdown. Unfortunately, Taiwan, being a small and open economy, faces greater currency depreciation pressure to counter tepid external demand. In our view, the New Taiwan dollar will remain weak or could weaken further in 2009.

Polaris Securities provided the article.

(HK Edition 12/04/2008 page3)