Foreign demand, while a crucial drag, is not the only culprit. Consumer spending was up by just 1% last quarter, as households grappled with a record-high jobless rate of 4.6%. And companies are cutting inventories this year, another drain on economic growth. The government said real GDP is on track to shrink by 2.5% in the third quarter. In 2000, real GDP surged 5.9%.
The economic weakness came on suddenly and has exposed some cracks in the financial system. The stock market is down about 8% so far this year, and banks are saddled with a rising number of nonperforming loans. Standard & Poor's estimates 10% of Taiwan's bank loans are delinquent.
Immediately after the dismal GDP data were released, the central bank cut its target rate from 3.5% to 3.25%, the fifth cut this year. The move might help the corporate debt situation, but it also means further weakness for the Taiwanese dollar.
The GDP decline means Taiwan joins the list of east Asian economies that were once roaring and are now squeaking by. Singapore is officially in recession, Hong Kong's economy slowed dramatically this spring, and South Korea on Aug. 21 said its second-quarter economic performance was the worst since late 1998.
Taiwan's economic troubles have pushed the tiny island nation to forge even closer ties with China. On Aug. 20, the government announced plans to tap China's economic rise and perhaps loosen restrictions on trade and investment in China. Unfortunately, those plans are long-term goals and will do little to help the current woes. By James C. Cooper & Kathleen Madigan