Authors：Tain-Tsair Hsu（許添財）Shih-Hsien Chen（陳世憲）

The epidemic has returned, and the recovery is divergent. Some commercial service industries continue to decline, but the decline can gradually slow down after entering the fourth quarter.  Virus variants has caused a high risk of uncertainty. To slow down the recession, we can adopt sophisticated and precise "tailor policy" actions which take both the functions of epidemic prevention and the creation of "alternative mobility" into account.

1. Comprehensive analysis and prediction

The Commerce Development Research Institute (CDRI) found the Coincidental Cyclical Composite Index for Service Industry (CCCIS) has reduced to -1.18 standard deviation in July 2021. If there is no improvement, the standard deviation is predicted to continue to drop to -2.02 standard deviations by January 2022. This is the first time that it is lower than the -1.95 standard deviation which occurred in June 2009, and it would become the lowest since the 2008 financial crisis.  This means that if there is no improvement, the domestic business service industry that has been hit by the pandemic would be more sluggish than during the financial crisis, indicating that the impact of the domestic three-level epidemic prevention alert is quite serious due to the resurgence of the pandemic.  (Note: According to the historical experience of this system, if the change of the standardized cyclic composite index is between 0 and negative 1.5 σ indicates slowness or recession; if it is below 1.5 σ indicates depression.)

CCCIS started to stop rising from 0.32 standard deviations in July 2020 and then turned negative in January this year and continued to fall all the way to -1.18 standard deviations in July this year.  It shows that the sluggish trend of the business service industry in recent years has been rapidly declining this year due to the resurgence of the pandemic.  (Refer to Figure 1 "Trends and Forecasts of the Business Cycle Peer Composite Index", and the attached table "Taiwan's Business Service Industry Business Cycle Peer Index Composite Index")

Figure 1 "Trends and Forecasts of the Business Cycle Peer Composite Index"

Source：Business Cycle Forecasting Team, CDRI

According to the announcement by the Directorate-General of Budget, Accounting and Statistics, Executive Yuan, the economic growth rate in the first half of this year was up to 8.34%.  However, the growth rates and contributions of different sectors and industries vary greatly.
  
According to the sector categories, the main driving force is net output, which has a growth of 43.25% and a contribution of 5.64%.  The second is private investment, with a growth rate of 15.57% and a contribution rate of 3.02%.

The rest of the sectors all shows signs of sluggishness or decline.  Private consumption and government consumption only contributed 0.48% and 0.44% respectively.  The contributions of the government investment, government‑operated enterprise investment, and inventory investment were all negative, at -0.2%, -0.05%, and -0.64%, respectively.

Table 2. The economic growth rate, and contribution rate of each sector in the first half of 2021

Unit: Millions of New Taiwan Dollars,%

Source：the Directorate-General of Budget, Accounting and Statistics, Executive Yuan, and the Business Cycle Forecasting Team of CDRI

According to the industry category, the main driving force is industry, with a growth rate of 14.84% and a contribution rate of 5.51%; followed by the service industry, a growth rate of 5.07% and a contribution rate of 3.1%; however, both the growth rate and contribution rate of agricultural sector are negative.

Table 3. The economic growth rate and contribution rate of each industry in the first half of 2021

Unit: Millions of New Taiwan Dollars,%

 Source：the Directorate-General of Budget, Accounting and Statistics, Executive Yuan, and the Business Cycle Forecasting Team of CDRI

2. the trend of the business cycle

The compilation of the comprehensive index system of the business cycle was based on the research of the business cycle. We analyze the relevant economic indicators in time series and screen out those with the significance of the business cycle and the stability of the cycle.  It is classified into leading indicators, coincident indicators and lagging indicators by statistical analysis and verification.  It has proved that the circular trend composite index of coincident indicators is highly correlated with the circular trend of GDP, and the forecast value of the composite index of the peer indicators estimated by the leading indicator composite index can be used as a forecast of the trend of GDP changes. 

The leading and coincident composite indicator curve of this cycle indicator system is shown in Figure 2.

In March last year, the coincident index abnormally took the lead to reach the bottom in two months, but suddenly peaked in July 2020 and then fell all the way.  The leading index has continued to rise since its lowest one in May last year.  As mentioned in the previous paragraphs, the special "unbalanced recovery" caused by the serious interference of the epidemic situation can be explained.

Figure 2. The trend of cyclical leadership and the industry's comprehensive index

Source：Business Cycle Forecasting Team, CDRI

(1) Leading indicator series

1. Real GDP of Transportation and Storage

The trend value of this indicator's business cycle reached bottom, 97.13, in September 2020, and then it rose to 98.7(the estimated value) in July this year.  Obviously, although the trend is recovering, it is still below the long-term trend level.

Figure 3. The annual growth rate of transportation and storage GDP and the trend of business cycle, 2020Q1~2021Q2

2. the Private Real Fixed Capital Formation

The cycle trend value of this indicator system reached the lowest, 99.34, in June 2020, and then exceeded the long-term trend value of 100 in November of the same year, and reached 103.07(the estimated value) in July this year, showing that it has passed the stagnation period, and it is recovering strongly.

Figure 4. Annual growth rate and circular trend of private real fixed capital formation, 2020Q1~2021Q2

3. the balance of trade in services

The cyclic trend of this indicator reached the lowest, 95.4, in September 2019, and then rising all the way, reaching the long-term trend level in July 2020, with an index of 100.4, and reaching 104.7 in July 2021 (estimated). 

The service trade, which had a long-term deficit, will greatly improve Taiwan’s net service trade balance after the international pandemic blocked the flow of international tourism in 2020, and then turned into a surprising trade surplus in the second quarter of last year.  The net service trade revenue and expenditure in the first half of this year reached US$5.322 billion, with an annual growth rate of 1235%.

Figure 5. Annual growth rate and cyclical trend of net service trade revenue and expenditure, 2020Q1~2021Q2

4. the initial acceptance of unemployment benefits (inverted)

The trend of the economic cycle of this indicator reached the lowest, 92.73, in April 2020, and then rising all the way, exceeding the long-term trend value of 100 in December 2020, and reaching 110.52 in July this year, indicating that employment demand rapidly increases due to the large amounts of investment from the return of Taiwanese businessmen, therefore the number of people applying for unemployment benefits for the first time, a leading indicator of the unemployment rate, has dropped significantly.

Figure 6. Number of the initial acceptance of unemployment benefits (inverted) and the annual growth rate and circulation trend January 2020 to July 2021

5. the net entry rate of employees in the business services industry

The cyclic trend of this indicator reached its peak, 102.35, in May 2020, and then fell all the way and reached 93.72 in this July.  It shows that employment demand in the service industry has been severely impacted by the epidemic, which is contrary to the boom in the manufacturing industry.

Figure 7. Annual changes and cyclical trends in the net entry rate of employees in the business service industry, January 2020 to July 2021

6. the stock price index of the business services sector

The circular trend of this indicator reached the lowest, 95.4, in May 2020, and then kept rising all the way, exceeding the long-term trend level in February this year, and reaching 107.23 this July, reflecting the prosperity of Taiwan’s general stock market since the beginning of this year.  The impact of pandemic has accelerated the development of digital transformation, which contributes to the investment and development of the commercial service industry, and in turn makes the relevant commercial service industry stock market promising.

Figure 8. The annual growth rate and circular trend of the stock price index of the business service industry, January 2020 to August 2021

 7. the Real GDP of Finance and Insurance Sector

The cyclic trend of this indicator reached the lowest, 99.98, at the end of 2020, and then kept rising all the way, reaching 102.58 in July 2021, indicating that the economy is rising slightly.

Figure 9. Annual growth rate and cyclic trend of real GDP of Finance and Insurance Sector, 2020Q1~2021Q2

(2) Coincident indicator series

1. Real GDP index of wholesale and retail

This indicator cyclical trend reached bottom in December 2019, with an index of 99.47. After a year of slow recovery, it reached 100.64 in March this year (2021), but it turned down again in the second quarter, with an index of 100.58.  It shows the business cycle trend stays along the long-term trend horizontal line without significant fluctuations.

Figure 10. Annual growth rate and cyclic trend of real GDP index of wholesale and retail, 2020Q1~2021Q2

2. Real GDP of the accommodation and catering industry

The industry has been greatly impacted by the epidemic. The cyclic trend of this indicator peaked in June 2019 with an index of 102.5, and then fell all the way. It was lower than the long-term value in the fourth quarter last year and had fallen to 93.8 this July.

Figure 11. The annual growth rate and circular trend of real GDP in the accommodation and catering industry, 2020Q1~2021Q2

3. Real GDP of real estate and residential service industry

The circular trend of this indicator fluctuates slightly over a long period of time. The index peaked last July, with an index of 100.19 and then a slight decline, reaching 99.59 in July this year (estimated). 

Figure 12. Annual GDP growth rate and cyclical trend of real estate and residential service industry, 2020Q1 ~ 2021Q2

 4. Residential services, utilities, and other fuel industries

The cyclic trend of this indicator has little long-term fluctuation. It reached the bottom in June 2019 with an index of 99.86, and then kept rising slightly all the way, reaching 100.3 in July this year (estimated).

Figure 13. Real consumption of Residential services, utilities, and other fuel industries, 2020Q1 ~ 2021Q2

5. Number of employees in the service industry

The circular trend of this indicator peaked in February last year with an index of 100.21, and then fell all the way to 99.41 this July.  It showed a slight decrease, but the rate of decrease has increased gradually this year.

Figure 14. The growth rate and cyclic trend of the number of employees in the service industry, January 2020 to July 2021

(3) Lagged index series

The lagged indexes include real consumption of tobacco and alcohol, real consumption of clothing, footwear, and apparel, real consumption of furniture, equipment, and housekeeping, and the number of initial recognition and acceptance of unemployment benefits.  The lagged index can be used as a reference for observing whether business cycle is over. This article omits relevant analysis.

3. Overview of the business cycle and policy implications

1. Taiwan's overall economy is in the recovery phase, but the resurgence of the pandemic has caused uneven recoveries across sectors and industries.
2. Employment in different sectors and industries reflects different results:  service trade turned losses into profits for the first time, private investment continues to rise, and consumption was relatively sluggish.  The manufacturing industry thrives, the information and electronics industries dominate the market, yet the service industry goes into recession, especially in the tourism, lodging and catering areas.
3. The impact of the pandemic has caused greatest challenges to the digitalized economy and digital transformation, as well as the effectiveness of government's "policy formulation".  While facing the virus variants‘ high degree of uncertainty, government will need a more flexible and quickly response.
4. The recommendations are as follows:
(1) Take the broadly effective "alternative mobility" approach instead, and build a cross-industry system integration intelligent e-commerce platform that can be shared by small and medium-sized enterprises to accelerate the development of digital economic infrastructure.
(2) Precisely formulate a "tailor policy" to fully support enterprises and laborers in appropriate, timely, and demanding ways. 

Appendix
Business Cycle Coincident Composite Index for Taiwan Service Sector