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Because the speed and extent of the global economic downturn exceeded expectations, with the three major economies of the US, Japan and Europe experiencing various degrees of declining growth at the same time, Taiwan suffered a heavy impact. Exports contracted by 8.3% and, under the combined effect of falling export demand and weak domestic demand, imports declined by 12.2%. On the domestic demand side, private consumption was dampened by the slump in the stock and real estate markets, the effect of continuing wealth and income reduction, and the influence of rising unemployment, to register just 1.3% growth over the previous year. And with the adverse business environment at home and abroad prompting most firms to adopt conservative strategies, plus the restructuring difficulties and exodus of traditional industries, private investment plunged 23.8%. As cutbacks in general government expenditure continued, public expenditure contracted 2.0% year-on-year. Government investment, affected by delay in the passage of the annual and supplementary budgets, as well as by slowness in the authorization of subsidies for local grassroots projects, recorded negative growth of 1.7%. And because of certain projects not being carried out according to schedule, investment by state-owned enterprises fell by 3.2%. Under the effect of weakened foreign and domestic demand, it is estimated that the economy shrank by 2.1% in 2001.
Although depreciation of the NT dollar pushed up the cost of imports, the wholesale price index (WPI) fell 1.1% under the combined influence of the cooling of the global economy, shrinking demand, stabilization of the international crude-oil price, and falling agricultural and industrial raw material and product prices. The consumer price index (CPI) rose just 0.1%, due partly to the abundance of frui and meat supplies, and partly to the intense competition in the domestic market, which made it very difficult for retailers to increase prices, while charges for services also held stable.
According to projections by Wharton Econometric Forecasting Association (WEFA), the world economic growth rate will rise moderately to 1.7% in 2002, with the US economy entering a mild recovery in the second half of the year. On the domestic front, after gaining smooth entry to the WTO, Taiwan should be able to extend its trading reach, heighten its international visibility, and so spur on its production and foreign trade. Because of the difficulty of substantially improving the problem of structural unemployment in the near term, consumer spending is expected to remain conservative. Private investment should be boosted by implementation of the high-speed railway project, the issuance of 3G licenses, and the development of large-scale industrial zones and commercial parks. And as the government puts into effect the consensus reached at the Economic Development Advisory Conference (EDAC), actively improving the investment environment and working all-out to attract foreign business investors, the economy should gradually recover stability, with growth for the year projected to reach 2.23%.
On the interest-rate front, with the US Federal Reserve Board deciding at the end of January to keep the federal funds rate unchanged at 1.75%, market expectation is that rates could start to rise again after the second quarter. In Taiwan, the central bank has indicated that it will maintain its loose monetary policy, and will not raise its benchmark interest rates within the near term. Also, the economy is expected to linger in the pre-recovery phase and not turn around until the second half of the year, while private consumption willingness remains constrained and the outlook for consumer prices is stable for the whole year, all of which are conducive to the central bank's continuation of its loose monetary policy, and mean that there is little pressure on the bank to start adjusting rates upward. On the exchange-rate front, the direction of the NT dollar's value will depend upon the state of economic recovery, the situation of the stock market, and the movement of the Japanese yen.