May 21 (Bloomberg) -- Taiwan’s economy shrank an unprecedented 10.24 percent last quarter as exports fell and businesses cut spending, a decline that may mark the trough in the island’s recession.

The drop follows the fourth quarter’s revised 8.61 percent contraction from a year earlier, and is the biggest slump since official records began in 1952, the statistics bureau said in Taipei today. The median estimate in a Bloomberg News survey of 12 economists was for a 9.26 percent decrease.

Taiwan’s stock index rose to the highest in almost nine months today on optimism China’s fiscal stimulus and closer relations with the mainland may help ease the economy’s slump. The government forecast today that gross domestic product will decline in the second and third quarters before expanding 5.2 percent in the final three months of the year.

“The first quarter is the bottom,” said Ma Tieying, an economist at DBS Group Holdings Ltd. in Singapore. “From export and industrial output data, we can see that the economy is already picking up.”

The report was released after the close of trading on the stock exchange. The Taiex index climbed 0.2 percent to 6,718.81, extending this year’s gain to 46 percent.

The island’s dollar advanced 0.4 percent to NT$32.738 against the U.S. currency at the 4 p.m. local close of trading, according to Taipei Forex Inc. It touched NT$32.606, the strongest level since Dec. 22.

Workers Rehired

Taiwan Semiconductor Manufacturing Co., the world’s largest custom-chip maker, said it offered to rehire hundreds of laid off workers after a rebound in sales. Taiwan Semiconductor, along with AU Optronics Corp., were among companies that pared capital spending and hiring as the global recession cut exports.

“Although the economic crisis is not over, the company’s revenue has already improved with the second quarter being much better than the first,” Morris Chang, chairman of the Hsinchu, Taiwan-based company, said in an e-mail published yesterday. “So the worst has already passed.”

Taiwan’s economy shrank 4.84 percent last quarter from the previous three months, when it contracted 5.62 percent, today’s GDP report showed.

Among evidence the recession is easing, retail sales declined 4.7 percent in March, less than the 10.3 percent drop in February. Exports, which account for more than two-thirds of the economy, fell 34.3 percent in April, slowing from a 35.7 percent slump in March.

China Ties

The island is starting to benefit from the Chinese government’s 4 trillion-yuan ($586 billion) stimulus to spur the world’s third-biggest economy. China is Taiwan’s largest export market followed by the U.S.

President Ma Ying-jeou vowed yesterday to prioritize economic ties with China. His first year in power has been marked by improving relations with China after he abandoned his predecessor’s pro-independence stance.

The two economies on April 26 signed agreements to increase direct flights, boost financial cooperation and crime prevention.

The statistic bureau expects an average 3,000 Chinese tourists a day, each with a daily spend of $237, adding in total of 0.4 percentage point to GDP in 2009.

“There is a lot of potential in the improved cross-strait relations,” said DBS Group’s Ma. “Taiwan will also benefit from improved demand from China as effects of the stimulus package start to show.”

Still, global policy makers are cautioning it may be too soon to say a recovery is assured.

Note of Caution

In a report yesterday, Federal Reserve officials, who see possible signs of “stabilization” in the U.S. economy, signaled they’re not convinced those improvements will persist.

China’s economy faces “great uncertainties” as the impact of the global financial crisis deepens, the state-run Xinhua News Agency reported today, citing vice premier Li Keqiang.

Export-dependent economies across Asia have been roiled by the worst global slump since World War II. Japan’s economy shrank at a record 15.2 percent annual pace in the first quarter, data showed yesterday. Hong Kong’s GDP fell 4.3 percent last quarter from the previous quarter, the biggest drop since 1990.

“Taiwan’s GDP could turn positive in the next few quarters, but it can only become really strong again when the global economy recovers,” said Joseph Lau, a Hong Kong-based economist at Credit Suisse Group AG.

Rising Unemployment

Figures tomorrow may show the jobless rate climbed to a record 5.84 percent in April, a survey of economists showed.

The statistics bureau today cut its forecast for 2009 GDP to a 4.25 percent drop from a February prediction of a 2.97 percent decline.

To revive growth, the government plans NT$858.5 billion ($25 billion) of spending over four years, equal to about 6 percent of GDP, on infrastructure, consumer grants and tax cuts. It handed out NT$82.9 billion of shopping vouchers in January.

Taiwan’s central bank cut interest rates to a record-low 1.25 percent in February. The bank kept its policy unchanged at the last meeting in March, with Governor Perng Fai-nan saying borrowing costs are very low.

“All the data we’ve gathered indicate that the first quarter is the bottom for our economy,” Shih Su-mei, the island’s top statistician, told reporters.

To contact the reporters on this story: Janet Ong in Taipei at jong3@bloomberg.net; Chinmei Sung in Taipei at csung4@bloomberg.net.

Last Updated: May 21, 2009 06:54 EDT