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

【Abstract】

The CDRI business cycle indicator shows that Coincidental Cyclical Composite Index for Service Industry (CCCIS) in October 2023 has indicated a continuous recovery since July 2022, and the upward trend also has continued to get strengthening, with a projected persistent increasing until April 2024. This suggests a robust recovery has underway in the Commercial Service Industry.

As for Leading Cyclical Composite Index (LCCIS), it continues to decline, but the downward trend, which slightly slowed in Q2, showed a mild acceleration in Q3. This indicates it is still uncertain regarding the expected overall economic recovery. However, among its seven sub-indicators, three have shown an increase, and the convergence of the Diffusion Index suggests that the risk of a sustained decline in the overall economy, primarily driven by the manufacturing sector, is gradually diminishing.

There are some key points and implications regarding the changes in Business Forecast for Taiwan’s Commercial Service Industry in Q4 2023 as follows:

1.     The pace of economic recovery in the Commercial Service Industry is expected to remain robust. However, two sub-indicators within the Coincident indicator, namely “Real GDP in Accommodation and Catering Industry” and “Employment in the Commercial Service Industry,” both show a phenomenon of surpassing long-term growth trends significantly. This indicates that the vibrant sectors characterized by high labor intensity could be facing some severe operational pressures and limits for further growth due to labor shortages.

2.     The decline in the Leading Cyclical Composite Index (LCCIS) is expected to gradually ease, contributing to a reduction in the overall economic recession risk. However, among the seven sub-indicators, the economic cycle trend of “Real GDP in Transportation and Storage Industry” has surpassed its long-term trend, while the others are either slowing down or in a declining range. “Private Real Fixed Capital Formation” and “Net Balance of Trade in Services Revenue and Expenditure” are even in a severe recession zone. Without breakthroughs in industrial structure, it’s still a big challeng for the economy to depart from the long-term “low-level equilibrium” trap even after a recovery. In short, the causes lie in the economic and social structure characterized by declining birth rates, low wages, and an aging population.

3.     Amidst the global economic radical changes, every country has its own cross to bear. Taiwan, however, possesses valuable advantages in “chip technology” and “capital strength.” Opportunities are there for Taiwan’s economy to leap to the forefront of the world, including digital transformation, green energy transition, ESG sustainability transformation, AI innovation, biotech as well as healthcare industry. However, we observe a low willingness to invest, and innovation seems to be lagging. Perhaps, there’s still a lack of understanding in our mindset that this is a new era of the one-stop service that integrates “hardware, software, and services”.

1. Comprehensive analysis and prediction

CDRI finds that the Coincidental Cyclical Composite Index for Service Industry (CCCIS) has bottom out in July 2022 of -0.7456 Standard Deviation. However, as of October 2023, the index has steadily risen to a positive value of 1.3860 Standard Deviations. It’s predicted that the index will continue to steadily increase and reach 2.4613 Standard Deviation by April 2024. It’s clearly seen that the economic recovery in the Commercial Service Industry is visibly stable. (See Figure 1 and the appendix below)

Figure 1. “Tendencies and Forecasts of the Coincidental Cyclical Composite Index for the Service Industry”

Source: Business Cycle Forecasting Team, CDRI

Based on the data provided by the Directorate General of Budget, Accounting and Statistics, Executive Yuan, the economic growth rate for Q3 this year (2023) reached 2.32%. The main momentum behind economic growth is Private Consumption, followed by Net Exports. Private Investment, however, is experiencing a severe decline, exerting the most significant impact on overall economic growth.

From the perspective of GDP expenditure, the growth rate contribution of Private Investment reached -13%, and a contribution of -3.2%. The reduction in inventories has widened by 58.89%, contributing -0.3% to economic growth, which has a secondary impact. Government Investment has grown by 3.74%, contributing -0.1% to economic growth, ranking next in influence.

Private Consumption, which had the weakest growth contribution rate in the past, has not only reversed its growth rate but also emerged to the top position in terms of growth rate contribution, with a growth rate of 9.23% and a contribution of 4.15% during the same period. Net Exports grew by 9.24%, contributing 1.65% to economic growth. Government Consumption made no contribution, and Government-owned Enterprises Investment contributed only 0.1%. (See Table 2 below.)

From the perspective of industry, the growth rate contribution in Q3 2023 has also undergone major changes. The growth rate and contribution of the Service sector have surpassed all the rest sectors. The Service sector has a growth rate of 5.1% and a contribution of 3%, while the Industrial sector has a growth rate of -4.89% and a contribution of -1.99%. The overall economic decline is mainly attributed to a substantial decline in the Industrial sector, mainly in manufacturing.

Table 2. Q3 2023 economic growth rate and growth contribution rate, by sector

                                                          Unit: Millions of New Taiwan Dollars; %                                                                       

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

Table 3. Q3 2023 economic growth rate and growth contribution rate, by industry

                                                                                                                    Unit: Millions of New Taiwan Dollars; %

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

Upon further examination of different sectors and industries, it is found that Private Enterprises have been suffering a severe decline in Investment, Manufacturing, and Exports, while Private Consumption of products and services is relatively prospering, resulting in a severe imbalance.

2. Service industry business cycle outlook

【Regarding the indicator system】

The business cycle Composite Index system on the Time Series Analysis. We analyze the relevant economic indicators in the time series and select indicators based on their significance to the business cycle and stability of their cyclicality.  They are then classified into leading indicators, coincident indicators and lagged indicators through the use of statistical analysis and verification.

The cyclical trend of the Composite Index of coincident indicators is shown to be highly correlated with the cyclical trend of the GDP, and the forecast value of the Composite Index of the coincident indicators, estimated by the Leading Indicator Composite Index, could be used to forecast the moving trends of the GDP.

The cyclical trend of economic indicators fluctuates around the long-term trend. The long-term trend value is normalized to 100; cyclical trend values greater than 100 indicate a recovery or prosperity stage while values below 100 indicate a recession or depression stage.

The standardized changes of the indicators’ cyclical trend values (in Standard Deviation units) are added up to become a Composite Index, and it fluctuates around the long-term trend value with a Standard Deviation of zero.

【Latest Indicator Trends】

The Leading and Coincidental Composite Indices Curve for this business cycle’s indicator system is shown in Figure 2.

Leading Cyclical Composite Index (LCCIS) has dropped from its peak of 0.8601 Standard Deviations in November 2021 to -0.9238 Standard Deviations in October of the current year (2023). However, the rate of decline has continued to slow down significantly since this year.

Looking at the diffusion situations of the leading indicators, only one of the seven sub-indicators, “the real GDP Indicator of the Transportation and Storage Industry,” is on the rise, compared to the previous quarter. In Q2 this year, the Net Entry Rate of Employees in the Commercial Services Industry has also shown an increase, and both indicators are now on an upward trend that is accelerating. We once again see the Finance and Insurance Sector indicators joining the upward trend in Q3. It’s evident that while the LCCIS has not yet turned from a decline to an increase, the convergence of the diffusion index indicates a slowdown in the downward trend.

The CCCIS has been directly affected by the pandemic, having fallen from its peak of 0.5469 Standard Deviations in September 2020, and turned negative starting in June 2021, reaching its lowest of -0.7456 Standard Deviations in July 2022. It then began to recover and reached a positive value of 0.1352 Standard Deviations in April of the current year (2023) and continued to rise to 1.3860 Standard Deviations in October. It is predicted to continue rising to a positive value of 2.4613 Standard Deviations by April 2024. However, the upward trend will weaken by then. Nevertheless, it’s evident that the Commercial Service Industry is poised for a sustainable and robust recovery. (See Figure 1 above and the attached appendix)

Furthermore, when observing the diffusion of the coincident indicators, among the five sub-indicators, only “Real Consumption of Residential Services, Utilities, and Other Fuel Industries,” is currently experiencing a continuous decline. The other four sub-indicators have all embarked on the path of recovery. Additionally, the two sub-indicators for the Accommodation and Catering Industry and the Employment of the Service Industry show a very strong upward trend, far surpassing the long-term trend value of 100. This has led to a robust recovery situation in the entire CCCIS.

Figure 2. Leading and Coincidental Cyclical Composite Index for the Service Industry

Source: Business Cycle Forecasting Team, CDRI

A. Leading indicator series

a. Business cycle trend of real GDP of the Transportation and Storage Industry continues to rise, while the upward momentum in Q3 is slightly moderate, the recovery remains strong.

The cyclical tendency of this sub-indicator reached its lowest point in September 2021, with a value of 92.6. It then steadily rose, surpassing the long-term trend value of 100 in December last year (2022). The momentum continued to strengthen, and as of October 2023, the index has reached a high of 112.2 (once being standardized, it’ll reach a positive 4.2211 Standard Deviations), indicating a very strong economic recovery. However, the upward momentum in Q3 has slightly weakened.

However, the annual growth rate (YOY), calculated based on its actual value, has turned from negative to positive in Q2 2022, the fluctuation of the growth rate has increased, reaching 25.26% and 36.56% in Q1 and Q2 this year (2023), respectively. Though it gets back to 27.53% in Q3, it still indicates economic vigor.

Figure 3. The annual growth rate of Transportation and Storage GDP and business cycle trend, 2020Q1~2023Q3

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

b. The cyclical trend of Private Real Fixed Capital Formation continues to decline, with actual values showing negative growth for three consecutive quarters.

The cyclical tendency of this sub-indicator reached its peak in March 2022, with an index of 104.7, and declined all the way. In February 2023, the index fell below the long-term trend value. In October 2023, it has fallen to 90.8, (it has reached -2.5901 Standard Deviations after being standardized). It’s worth noting that the fervor of Private Investment once driven by the return of Taiwanese businesses is now significantly cooling down.

In addition, the year-on-year growth rate (YoY) based on its actual GDP value has remained positive for each quarter from 2020 to 2022. In Q3 2021, it reached a peak growth rate of 24.05%, but it has been gradually slowing down. In Q3 2022, it was only 4.28%. While there was a 6.27% increase in Q4, Q1 and Q2 this year (2023) have seen consecutive declines of -3.96% and 10.28%, respectively. In Q3, it continued to decline to -13.00%. The halt in Private Investment is evidently unfavorable for future economic growth.

Figure 4. Annual growth rate and cyclical trend of Private Real Fixed Capital formation, 2020Q1~2023Q3

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

c. The Net Balance of Trade in Services Revenue and Expenditure, which saw a rare surplus during the pandemic, has now reverted to the historical deficit norm. Its cyclical trend has shifted to a sustained decline post-pandemic, with actual values showing negative growth for four consecutive quarters.

Looking at its actual GDP value, Taiwan’s service industry, which had enjoyed a rare trade surplus since Q2 2020, has encountered a reversal after 11 quarters. In Q1 this year (2023), it has reemerged as a trade deficit, amounting to $1.698 billion USD, and in Q2, this deficit expanded further to $2.357 billion USD. It even expanded to $4.395 billion USD in Q3. The total trade deficit in the Service Industry for Q3 this year reached a significant $8.447 billion USD, equivalent to 13.33% of the total trade surplus in goods during the same period, which was $63.377 billion USD.

The cyclical tendency of this sub-indicator hit a trough in September 2019 and reached a peak in January 2022, followed by a slight decline, and the decline continues to intensify. As of December 2022, the index was below the long-term trend value and was rapidly declining. As of October 2023, it has continued to accelerate its decline, reaching 60.4 (once being standardized, it’ll drop to a negative 5.7426 Standard Deviations). It’s indicated that Taiwan’s trade in services has historically been in deficit, but the disruption of international travel due to the pandemic in 2020 led to a significant improvement in Taiwan’s Net Balance of Trade in services, which became a rare surplus starting from Q2 2020. However, now that the pandemic is finally over and countries are gradually lifting restrictions, international travel is resuming, and Taiwan’s Service Industry trade deficit, driven by long-term structural factors, is once again becoming evident.

Looking at its actual GDP value of the Net Service Trade, it experienced a negative growth of -84.51% in Q4 last year (2022), -134.66% in Q1 this year (2023), -163.58% in Q2, and -233.46% in Q4. This clearly indicates an expanding trade deficit.

Figure 5. Annual growth rate and cyclical trend of net trade in Services Revenue and Expenditure, 2020Q1~2023Q3

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

d. Initial Acceptance of Unemployment Benefits (inverted) indicates that the economy is not doing well. While there is a severe labor shortage in the Accommodation and Catering Industry, the overall pressure on labor demand has eased.

The cyclical tendency of this sub-indicator reached its lowest value of 90.0 in May 2020, and then rose all the way, and had exceeded the long-term trend level of 100 in May 2021. It reached 109.3 at its peak in April 2022, indicating a rapid recovery in employment demand. However, it subsequently reversed and started declining. As of October 2023, the inverted Initial Acceptance of Unemployment Benefits stands at 90.6, indicating a slowdown in employment demand. However, it’s worth noting that the Manufacturing and Service Industries are exhibiting an opposite trend of uneven economic situation (both domestically and externally), showing that this indicator, which reflects the overall labor market situation, may not fully represent the conditions in the Commercial Service Industry, particularly in the recovering Accommodation and Catering Industry, which is booming, and the labor shortage situation is still difficult to see immediate relief.

Figure 6. Number of the initial acceptance of unemployment benefits (inverted) and the annual growth rate and cyclical trend January 2020 to October 2023

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

e. Net Entry Rate of Employees in the Commercial Services Industry has reached its lowest point in December last year, and now, there is a mild expansion in employment demand in the Service Industry.

The cyclical tendency of this sub-indicator reached its peak of 102.2 in October 2021. The cyclical trend index, then shifted from rising to falling, has been below the long-term trend since June 2022 and hit its lowest point at 98.7 in December 2022. After the turnaround from a decline, the growth momentum briefly accelerated, but in Q3 2023, it has slowed slightly. As of October 2023, the cyclical trend index is at 99.8, indicating a modest expansion in employment in the Commercial Service Industry.

Figure 7. Annual changes and cyclical trends in the net entry rate of Employees in the Commercial Service Industry, January 2020 to September 2023

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

f. Stock Price Index of the Commercial Services Sector has stopped rising and turned downward, significantly impacting economic fluctuations. However, the downward trend has continued to slow down.

The cyclical tendency of this sub-indicator has reached its peak October 2021, with an index of 108.6. This reflected the prosperous trend of the general stock market in Taiwan for the past year and a half. However, due to the lack of follow-up, it started to decline after reaching the peak, and has continued to decline for 23 months. As of October 2023, it has dropped to 94.0. Nevertheless, the declining trend has been consistently slowing down since the end of 2022, with the rate of decrease accelerating, decreasing from a maximum of -0.21 in June 2022 to -0.42 in October 2023.

An indicator is the annual growth rate of the actual Stock Price Index. It turned negative in May 2022, and the decline continued to expand, with a drop of over 30% in September. In December and January 2023, the decline remained in double digits at -24.73% and -19.16%, respectively. Subsequently, the negative growth rates turned to single digits, with February, March, and April recording -8.37%, -2.84%, and -3.90% respectively. It showed growth in May and June with YOY growth rates of 2.29% and 2.59%, respectively. However, in July and August, it turned negative with a rate of -2.71% and 3.89%; in September and October, both turned positive with a rate of 0.92% and 5.58%. This indicates that its trend is still experiencing relatively mild fluctuations in a downward direction, but the decline is noticeably slowing down, and we hope to see a stable recovery soon.

Figure 8. The annual growth rate and circular trend of the Stock Price Index of the commercial service industry, January 2020 to October 2023

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

g. The real GDP growth rate in the Finance and Insurance Sector had four consecutive quarters of negative growth, but it kept turning upward in Q2 and Q3 this year. The cyclical trend, which experienced a continuous decline for one year, is currently on the rise.

The cyclical tendency of this sub-indicator reached its peak at 102.8 in August 2021, and then turned downward, returning to the long-term trend value (100) in June 2020, and keep declining. As of January 2023, it has dropped to 98.5. After reversing and starting to rise, it has gradually increased to 99.6 by October, indicating that the economy has not experienced a rapid recovery but has returned to the edge of the long-term trend.

Also, looking at the annual growth rate (YOY), it turned negative starting in Q2 last year, with a growth rate of -2.86%. In Q3, it further decreased to -5.86%, followed by -9.82% in Q4, and -4.38% in Q1, 2.86 in Q2 this year, 4.65% in Q3. This confirms that after a year of continuous decline in the economic trend, there is now a slight hope of recovery.

Figure 9. Annual growth rate and cyclical trend of real GDP of Finance and Insurance Sector, 2020Q1~2023Q3

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

B. Coincident indicator series

a. The business cycle trend of “Real GDP Index of Wholesale and Retail” was on a downward swing. However, the actual values have turned positive for two consecutive quarters, indicating a slow recovery in progress.

The cyclical tendency of this sub-indicator reached its peak of 101.3 in April 2021. It has been declining since then and fell below the long-term trend value of 100 in July 2022, reaching a trough in March 2023 with a cyclical trend value of 99.0. After a slight increase for two consecutive quarters, it indicates that the economy, while only approaching the long-term trend, is clearly showing a gradual recovery.

Meanwhile, looking at the actual values annual growth rate. In Q4 2022, the growth rate turned negative at -4.13%, and in Q1 2023, it further declined to -7.01%. However, in Q2, it turned positive at 1.03% and 0.73% in Q3, indicating that the economy is gradually recovering.

Figure 10. Annual growth rate and cyclical trend of real GDP Index of Wholesale and Retail, 2020Q1~2023Q3

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

b. “Real GDP of the Accommodation and Catering Industry” bottoms out in August 2022. After a continuous acceleration in recovery, although the upward momentum has slightly slowed in Q3 this year, the economy is still in a steady and robust recovery.

The industry has been greatly impacted by the pandemic, but it has also experienced a rapid post-pandemic recovery. A sharp retaliatory recovery has emerged after the pandemic.

The cyclical tendency of this sub-indicator reached the bottom in August 2021, with a value of 93.4. It then continued to accelerate, returning above the long-term trend value of 100 in November last year (2022). As of October this year (2023), the cyclical index has reached as high as 108 (once standardized, it’ll reach a positive 3.5082 Standard Deviations), indicating a rapid economic recovery.

The actual annual growth was severely impacted by the pandemic, reaching its lowest point at -29.53% in Q3 2021. It then started to rebound, but the growth rates in each quarter have been fluctuating. In Q3 last year (2022) and Q2 this year (2023), there were exceptionally high growth rates of 45.01% and 35.96%, respectively. In Q3, there’s still a 13.62% growth rate, indicating that the economic cycle is stabilizing and recovering steadily.

Figure 11. The annual growth rate and circular trend of real GDP in the Accommodation and Catering Industry, 2020Q1~2023Q3

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

c. Real GDP of Real Estate and Residential Service Industry business cycle trend is on the rise from its trough. While there hasn’t been significant long-term cyclical fluctuation, the ascent above the long-term trend is contributing to the steady recovery of the service industry’s economic conditions.

The cyclical tendency of this sub-indicator fluctuates slightly over the long-term. The index peaked in November 2020, with a value of 100.5. From there, it gradually declined, and it fell below the long-term trend of 100 by December 2021 and accelerating downward. The downward trend gradually intensified but reached its lowest point in October 2022 with an index of 99.4. Subsequently, the upward momentum accelerated, reaching 100.9 by October 2023.

The actual annual growth rate reached -0.21% in Q4. In Q1 2023, it has become 0.09%, 1.35% in Q2, and 5.39% in Q3, showing that the economic is gradually recovering.

Figure 12. Annual GDP growth rate and cyclical tendency of Real Estate and Residential Service Industry, 2020Q1~2023Q3

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

d. Real consumption of “Residential Services, Utilities, and Other Fuel Industries” has experienced relatively minor long-term fluctuations. Despite continuous modest growth, the cyclical trend has been consistently downward. It’s the only one among the current five leading indicators in the economic indicator system that continues to decline.

The cyclical tendency of this sub-indicator showed little long-term fluctuation. It reached the bottom in September 2021, with a value of 100.20, and then slightly declined all the way. The downward trend has accelerated slightly since this year (2023), and the business cycle index reached 99.7 in October.

Looking at the annual growth rate, growth has been observed in every quarter since 2020, but the magnitude of the fluctuations has been small. The annual growth rate has fluctuated between a high of 2.58% (in Q2 2020) and a low of 1.22% (in Q2 2022). In Q3 2021, there was a growth of 2.54%, reaching its peak. Subsequently, it fluctuated downward, hitting the lowest point in Q2 2022, with a growth of 1.22%. It then surged to 1.67% in Q3, followed by a gradual reduction in quarterly fluctuations. In Q3 this year (2023), the growth rate has dropped to 1.35%, indicating that while the actual year-on-year growth remains positive, there hasn’t been significant long-term economic fluctuation, and the current cyclical trend has yet to show signs of recovery.

Figure 13. Real Consumption of Residential Services, Utilities, and Other Fuel Industries, 2020Q1~2023Q3

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

e. The cyclical trend of Number of employees in the Service Industry has shown a continuous upward trend in the business cycle, surpassing the long-term trend value since March 2023. This indicates an increase in labor demand. Consequently, the pressure of labor shortages has been on the rise, with no sign of easing.

The business cycle trend of this indicator hit a trough in April last year (2022), with an index of 99.5. After the decline, it gradually started to rise, and by March this year (2023), the trend value exceeded the long-term trend of 100. Furthermore, the momentum has continued to strengthen, with the cyclical index reaching 100.9 in October (once standardized, it’ll reach a positive 4.3562 Standard Deviations). It indicates an unprecedented prosperity in employment within the Commercial Service Industry, which complements the vibrancy in the Accommodation and Catering Industry. However, this mutual prosperity also comes with significant labor shortage pressures.

Looking at the annual growth rate, it has been consistently positive since December last year (2022), and the growth rate has been steadily increasing. Starting at 0.07% in December 2022, it has risen to 2.52% in September and 2.48% in October this year (2023). This reflects an increase in labor demand, which, in turn, has heightened the pressure on employers due to labor shortages.

Figure 14. The growth rate and cyclical tendency of The Number of Employees in the Service Industry, January 2020 to October 2023

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

C. Lagged indicator series

The lagged indicator includes 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 a business cycle is over. This article omits relevant analysis.

Appendix

Business Cycle Coincident Composite Index for Taiwan Service Sector