Taiwan GDP Shrinks as Slowdown Seen From Japan to Korea

Taiwan’s economy unexpectedly shrank, South Korean output fell and a Japanese manufacturing gauge reached the lowest level since the wake of the 2011 earthquake, adding to the case for expanded stimulus policies in Asia.

Gross domestic product in Taiwan fell 0.16 percent in the second quarter from a year earlier, according to preliminary data released by the statistics bureau in Taipei today. A purchasing managers’ index in Japan slipped to 47.9 in July from 49.9 in the previous month, according to Markit Economics, while South Korea’s industrial production declined 0.4 percent in June.

The impact of Europe’s debt crisis has increased pressure on Asian authorities to support growth, with the Philippines unexpectedly cutting interest rates last week and central bank officials in Japan and Thailand indicating they are ready to ease policy if necessary. The U.S. Federal Reserve and the European Central Bank meet this week as speculation they will take steps to bolster growth spurs gains in stocks.

“Policy makers will continue to roll out measures to protect growth from the euro zone market turbulence and recession, as well as from the slowdown in China and the U.S.,” said Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole CIB. “There is monetary room in Asia but it is somewhat limited,” he said, predicting interest-rate cuts in India and rising chances of easing in Vietnam, Malaysia, South Korea and Taiwan.

Asian stocks advanced a fourth day, with the MSCI Asia Pacific Index (MXAP) gaining 1.2 percent as of 2:42 p.m. in Tokyo, headed for a second monthly gain.

Downside Risks

The Federal Reserve starts a two-day policy meeting today amid speculation it will add to monetary stimulus to boost the economy. U.S. consumer spending probably rose 0.1 percent in June following no change in May, according to the median estimate of economists in a Bloomberg News survey.

The Conference Board’s index of consumer confidence probably fell in July for a fifth month, the longest stretch of declines since the first half of 2008, a separate poll showed. The gauge is estimated to have fallen to 61.5 from 62 in June.

Elsewhere, euro-area unemployment may have climbed to 11.2 percent in June from 11.1 percent a month earlier, according to a Bloomberg News survey. Inflation data for the euro area is also due today.

Japan’s jobless rate unexpectedly fell to 4.3 percent in June from 4.4 percent the previous month, a report showed today. The decline may not be enough to dispel concerns that the economy’s recovery is losing steam. The PMI reading is the lowest since April 2011, a month after the earthquake.

Warning Signal

“The figures are flashing a warning signal to Japan’s recovery,” said Shuichi Obata, senior economist at Nomura Securities Co. in Tokyo. “Japanese companies are becoming more cautious of the outlook.”

Japan’s Cabinet today approved a strategy to meet an average nominal growth target of 3 percent through fiscal 2020, which includes the creation of a 50 trillion-yen ($640 billion) market in medicine, nursing and health care, that will create 2.84 million jobs. The plan includes a pledge to work with the Bank of Japan to combat deflation and a strong yen.

South Korean output fell for the first time in three months in June, Statistics Korea said today. Bank of Korea Governor Kim Choong Soo warned last week the economy is losing steam, fueling speculation policy makers will follow a surprise rate cut on July 12 with further easing.

Reserve Bank of India Governor Duvvuri Subbarao kept the benchmark repurchase rate at 8 percent today as predicted by 31 of 34 economists in a Bloomberg survey, and reduced the statutory liquidity ratio to 23 percent from 24 percent, effective Aug. 11, the first cut since 2010.

Fiscal Support

The central bank forecast a 6.5 percent expansion in the 12 months through March 2013, down from an earlier prediction of 7.3 percent. It estimated inflation of 7 percent by the end of the period, compared with a previous projection of 6.5 percent.

Taiwan cut its 2012 growth forecast to 2.08 percent from 3.03 percent today. The economy last contracted in 2009.

“Today’s GDP disappointment will add pressure on the central bank to cut rates, but with CPI still trending up and monetary conditions accommodative, we think fiscal policy would be more effective for sustaining growth,” said Donna Kwok, a Hong Kong-based economist at HSBC Holdings Plc. While chances of a rate cut have risen, “more government fiscal support will likely come first,” she said.

Taiwan’s exports have fallen for the past four months even as accelerating inflation crimps scope for lowering borrowing costs, prompting the government to consider stimulus measures.

Selective Controls

The central bank kept its benchmark interest rate unchanged at 1.875 percent for the fourth straight meeting in June and imposed selective controls on luxury housing. Premier Sean Chen last month asked the central bank to closely monitor domestic and global economic and financial conditions, and adopt appropriate monetary policies.

“The central bank seems to remain concerned about inflation and property bubbles on a pre-emptive basis,” Raymond Yeung, a Hong Kong-based economist at Australia & New Zealand Banking Group Ltd., wrote in a note last week. “As inflation has not trended down in considering the recent rebound of crude and increasing weather risks, our baseline is that the central bank is inclined to hold.”

The pressure to bolster the economy comes as President Ma Ying-jeou’s approval rate fell to 15 percent, the lowest since he took office in 2008, according to a survey conducted by TVBS Poll Center on July 2 and 3.

Exports Fall

Lawmakers from the opposition last week proposed a no- confidence vote against Chen and his Cabinet, and the government has faced two exits: secretary general Lin Yi-shih resigned in June amid bribery allegations, while Christina Liu stepped down as finance minister in May because of disagreements over the proposed capital-gains tax. The parliament approved a plan last week on the levy, capping almost four months of debate.

Industrial production unexpectedly declined in June, a report last week showed, while exports, which make up the equivalent of two-thirds of the economy, also fell last month as sales declined at companies including Chimei Innolux Corp., Taiwan’s largest maker of liquid-crystal displays.

The consumer-price index climbed 1.77 percent in June from a year earlier, after rising 1.74 percent the previous month, with damage to crops from rainstorms and electricity tariff increases in the second half posing further inflationary risks.

Taiwan today raised the inflation forecast for the year to 1.9 percent from 1.84 percent and cut the export growth estimate to 0.07 percent from 2.69 percent.

“We’re seeing the chance of inflation rising above 2 percent in the third quarter,” said Michelle Tsai, a Taipei- based analyst at Jih Sun Securities Co. “That’s going to make it more difficult for the central bank. I don’t think there’ll be room to cut the benchmark rate for the rest of the year. Instead, it will adjust liquidity.”

To contact the reporters on this story: Chinmei Sung in Taipei at csung4@bloomberg.net; Andrea Wong in Taipei at awong268@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang in Singapore at sphang@bloomberg.net

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