Economic shock for Taiwan

Taiwan has relied heavily on electronics exports

By the BBC's Damian Grammaticas

Taiwan's economy, battered by the global downturn, has registered its worst performance in 26 years.

After more than half a century of almost continuous growth, the island has cranked into reverse.

Information technology helped our economy to grow ... now the reverse is true

K C Lee, Council for Economic Planning and Development

Gross domestic product for the three months April to June this year shrunk by 2.35% compared to the same period last year, according to the Directorate General of Budget, Accounting and Statistics (DGBAS).

"It's the biggest drop since the first quarter of 1975 due to steep contractions in the island's exports, investment and production caused by a prolonged global slowdown," said DGBAS director general Lin Chuang.

Recession fears

There are now warnings that the island is heading for recession.

The official prediction is that the economy will contract by 0.37% this year.

"Taiwan is hit the hardest because of its heavy reliance on exports of electronics and telecommunications products to the US market" said Mr. Lin.

The results were far worse than both economists and Taiwan's government had predicted.

A small decline in GDP figures for the second quarter was expected. But analysts were predicting a decline of around 0.2%. The most pessimistic forecasts said 0.6%.

Central Bank acts fast

Taiwan's central bank immediately announced it was cutting interest rates to try to revive the island's economy.

The bank is shaving a quarter of a percent of its rates in the eighth cut since December

It is another sign, if one was needed, that the economic slowdown is beginning to bite around the world.

K C Lee, the Vice Chairman of Taiwan's official Council for Economic Planning and Development said "in the past we had export-led growth, now we have an export-led recession."

Export slump

The island is heavily reliant on overseas sales of the microchips, computers, and other electronic equipment it manufactures. They are responsible for a third of all its exports.

Taiwan makes an estimated quarter of all the personal computers sold in the world and half of the laptops and notebooks. But from the United States to Japan people are not buying the products the island depends on for its living.

The bad news has been piling up. Exports are down almost a third year on year, industrial output has declined almost 10%.

The result is Taiwan is caught in a vicious circle.

Companies are not investing. Instead they are laying off workers.

Unemployment is at a record high, Taiwanese are not confident about holding on to their jobs and they are not spending money.

So domestic consumption is also weak.

"IT helped our economy to grow. Now the reverse is true," said K C Lee.