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 2024 has indicated a continuous recovery for 25 consecutive months, 1.0265 Standard Deviations after being standardized. Although the pace has slightly slowed, it’s still forecasted to continue rising to 1.2919 Standard Deviations by April 2025.

With the economic upward fluctuations strengthening, four out of five sub-indicators of CCCIS exceeded their long-term trend value (100), except for the Accommodation and Catering Industry, which continues to decline.

The cyclical trend value for the Accommodation and Catering Industry dropped to 96.1 in October 2024, below its long-term trend value. Its real GDP growth rates for Q2 and Q3 of 2024 were -0.7% and -3.1%, respectively, indicating signs of a downturn. Additionally, the growth rate of Number of Employees in Service Industry has been decelerating, from 2.5% in September 2023 to 0.6% in October 2024.

Leading Cyclical Composite Index for Service Industry (LCCIS) rebounded in May 2023 after hitting a trough. The standardized cyclical composite index rose from -0.6684 Standard Deviations to 0.6731 by October 2024.

Among the seven sub-indicators of LCCIS, the Transportation and Storage Industry has continued to decline over the past year, with its cyclical trend value falling below 100. Its real GDP growth rate dropped from 45.3% in Q2 2023 to 1.8% in Q3 2024. Similarly, while the Net Service Trade Revenue and Expenditure showed a recovery trend, it hasn’t yet returned to its long-term trend value (100). Other sub-indicators, however, have exceeded their long-term trend values.

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

1. At present, the overall economy continues to show an upward trend, leaving little cause for pessimism. However, significant imbalances are evident across industries and sectors.
   Among industries, in terms of contributions to economic growth, the Service Industry is greater than the Industrial Sector. Among the seven sub-indicators of LCCIS, only Transportation and Storage Industry displays a downward cyclical trend. Similarly, among the five sub-indicators of CCCIS, only the number of employees in the Accommodation and Catering Industry is on a declining trajectory. Moreover, the business cycle trend values of Transportation and Storage Industry and Accommodation and Catering Industry have already been lower than the long-term trend value (100). Observing the structure of the expenditure side, the contribution of Private Consumption to economic growth is still higher than that of Private Investment and Net Exports.

2. Unbalanced Growth can only be diagnosed from the total structural factors, which are basically reviewed from the comparisons of productivity and the realization rate of value. Productivity is largely determined by technological capabilities and talent quality, with current emphasis placed on the application and realization of internet technological capabilities. The core elements of value realization are business models and network effects, among which consumer transaction costs are a top priority and are often overlooked by points such as infrastructure, public services, and transaction facilitation. These key points are often the differences between advanced nations and backward countries, or political and corporate cultures to one another.
3. Structural factors that lead to growth imbalances or impede progress can’t be resolved through demand-side improvements alone, especially by relying solely on aggregate demand strategies. Simply put, the key lies in the innovation of service value.

1. Comprehensive analysis and prediction

CDRI finds that the Coincidental Cyclical Composite Index for Service Industry (CCCIS) has bottomed out in August 2023 of -0.0676 Standard Deviation. However, as of October 2024, the index has steadily risen to a positive value of 1.0265 Standard Deviations. It’s predicted that the index will continue to steadily increase and reach 1.2919 Standard Deviation by April 2025, reflecting stable recovery in the Commercial Service Industry. However, growth is expected to moderate in Q1 2025. (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

Released by the Directorate-General of Budget, Accounting and Statistics (DGBAS): The economic growth rate for the first three quarters of 2024 stood at 5.19%. Growth drivers have shifted from Net Exports, contributing only 0.7%, to Inventory Changes and Private Consumption, which contributed 1.69% and 1.56%, respectively. Public sector spending (including Government Consumption, Government and Government‑Operated Enterprise Investment) contributed a total of 0.71%, while Private Investment added 0.61%. (Refer to Table 1 below)

Of the 5.19% GDP growth in the first three quarters, the Service Industry achieved a growth rate of 5.24%. Although slightly lower than 7.73% from the Industrial Sector, its contribution of 3.16% surpassed the Industrial Sector’s 2.94%.

Table 1. Q1-Q3 2024 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 2. Q1-Q3 2024 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

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 0.8374 Standard Deviations in November 2021 to -0.6684 Standard Deviations in May 2023. It has since rebounded, reaching 0.6731 by October 2024, marking 17 months of consecutive growth. This stable pace suggests continued economic momentum over the next six months.

Most sub-indicators demonstrate strong upward momentum, except for the cyclical trends in the “Real GDP of Transportation and Storage” which continue to decline at an accelerating pace.

The CCCIS has been directly affected by the pandemic, falling from a peak in August 2020 to a trough of -1.0291 Standard Deviations by September 2022. It then began to recover and reached a positive value of 0.0465 Standard Deviations in September 2023 and continued to rise to 1.0265 Standard Deviations in October 2024. It is predicted to continue rising to a positive value of 1.2919 Standard Deviations by April 2025. Although the growth rate is expected to ease in Q1 next year, it’s still certain that in addition to the Accommodation and Catering Industry and the Number of Employees, the Commercial Service Industry will continue to recover steadily (See Figure 1 above and the attached appendix)

Among the individual sub-indicators, the trend of the Accommodation and Catering Industry, which has been gradually declining since H2 2023, represents a new variable. Although the current cyclical trend is still showing accelerated decline, it has not yet impacted the overall trend of the Coincidental Cyclical Composite Index for Service Industry. However, it’s important to note that the cyclical trend of employed workers in the Service Industry has slightly slowed since May 2024, indicating that the upward trend is facing some resistance.

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 has declined for 13 consecutive months, accelerating in Q3 2024. The cyclical value dropped below the long-term trend value (100), while the real GDP growth rate slowed to 1.8%, highlighting the need for immediate interventions.

The cyclical tendency of this sub-indicator started to decline after ending a 25-month upward streak since October 2023. As of October 2024, it has been decreasing for 13 consecutive months, and the trend value has dropped to 98.59.

However, the annual growth rate (YOY), calculated based on its actual value, reached as high as 45.3% in Q2 2023. However, it has slowed down continuously, and by Q3 2024, it had dropped to 1.8%, indicating a booming economy. The temperature has continued to cool down, and the output value is sluggish. It seems that we need to find countermeasures quickly.

Figure 3. The annual growth rate of Transportation and Storage GDP and business cycle trend, 2020Q1~2024Q3

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

b. This cyclical trend reversed in Q4 2023 and continued rising. By Q4 2024, the cyclical value exceeded the long-term trend (100), with real GDP growth reaching +8%.

The cyclical trend value of this indicator experienced a 20-month decline starting in April 2022, reaching a trough of 96.67 in October 2023. It then began to recover, and by October 2024, the cyclical trend value had risen to 101.30, with the growth rate continuing to strengthen, indicating that a new wave of investment enthusiasm is accelerating.

Additionally, the year-on-year growth rate, calculated based on actual values, turned negative from positive in Q1 2023, dropping to -16.3% in Q4. Fortunately, it turned positive again in Q2 2024 at 7%, and further increased to 8.4% in Q3, demonstrating that domestic investment enthusiasm continues to rise.

Figure 4. Annual growth rate and cyclical trend of Private Real Fixed Capital formation, 2020Q1~2024Q3

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. The deficit reappeared in Q1 2023 and continued to worsen, with the Net Balance dropping by as much as -369.7% YOY in Q4 2023. However, in Q1 to Q3 2024, the decline slowed to -38.6%, -84.6% and -6.8, respectively. The cyclical trend value stopped declining in September 2023, rising from 88.77 in August to 98.19 by October 2024.

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 2023, it has reemerged as a trade deficit, with the total annual service trade deficit amounting to $10.055 billion USD. This is equivalent to 9.3% of the total Merchandise Trade Surplus of $108.101 billion USD during the same period. The service sector had a $11.065 billion deficit in Q1-Q3 2024, 14.62% of the $75.666 billion commodity surplus.

The cyclical tendency of this sub-indicator began to decline in February 2022, bottoming out in August 2023 with a cycle index of 88.77. The trend reversed in September, and by October 2024, it had risen to 98.19.

Looking at its actual GDP value of the Net Service Trade, it turned negative in Q4 2022, with the decline worsening to -369.7% by Q4 2023. However, in H1 2024, the decline significantly slowed, with Q3 showing a drop of -6.8%. This suggests that the worsening service trade deficit is starting to ease.

Figure 5. Annual growth rate and cyclical trend of net trade in Services Revenue and Expenditure, 2020Q1~2024Q3

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 overall pressure on labor demand is continuing to rise.

Unemployment rate is a lagging indicator of the business cycle, while Initial Acceptance of Unemployment Benefits can predict the unemployment rate. This lagging indicator can, in turn, predict leading indicators. Therefore, the Initial Acceptance of Unemployment Benefits (inverted) can be seen as a leading indicator of the business cycle. Employment is a coincident indicator of the business cycle, so the Initial Acceptance of Unemployment Benefits (inverted) can also predict employment trends.

The cyclical tendency of this sub-indicator reached its peak in May 2022, with an index of 110.08, showing a rapid recovery in labor demand. However, it began to decline afterward. By April 2023, the Initial Acceptance of Unemployment Benefits (inverted) dropped below the long-term trend value of 100. The cyclical trend value climbed to 100.53 by October 2024, reflecting sustained job demand growth.

Figure 6. Number of the initial acceptance of unemployment benefits (inverted) and the annual growth rate and cyclical trend January 2020 to October 2024

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 reached its lowest point in January last year, and rose all the way, exceeding the long-term trend value (100) by January 2024 and reaching 103.27 by October, indicating that there is a mild expansion in employment demand in the Service Industry.

The cyclical tendency of this sub-indicator hit the bottom in January 2023, with a cycle index of 97.24, then began to rise, reaching a cyclical trend value of 103.27 as of October 2024. This indicates a mild expansion in employment within the Commercial Services sector, but the upward trend has slowed down in Q3 this year.

Figure 7. Annual changes and cyclical trends in the net entry rate of Employees in the Commercial Service Industry, January 2020 to September 2024

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

f. The declining trend of the Commercial Services sector’s Stock Price Index hit a low in July 2023 and has been rising.

The cyclical tendency of this sub-indicator reached its peak in October 2021, with an index of 108.83, and started to decline, reaching a low of 95.62 in July 2023. Then it rebounded all the way. As of June, this year, it has returned to the long-term trend value (100), and the business cycle index reached 104.19 in October.

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 and -32.1% in October. In November and December 2022, and January last year, the decline remained in double digits at -31.5%, -24.73 and -19.16%, respectively. Subsequently, the negative growth rates turned into single digits. The index has been fluctuating within single-digit ranges from May 2023 until August 2024. It was not until September and October that double-digit increases were restored, which were 12.3% and 15.1% respectively. It’s obvious that its trend has regained its vitality.

Figure 8. The annual growth rate and circular trend of the Stock Price Index of the commercial service industry, January 2020 to October 2024

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 and turned positive in Q2 2023. The economic cycle trend has been steadily rising since hitting a low in February 2023. By October 2024, the cyclical trend value reached a record 104.25, signaling robust recovery.

The cyclical tendency of this sub-indicator peaked in June 2021, then declined, falling below the long-term trend value of 100 in April 2022 and reaching a low of 96.61 in February 2023. After reversing its downward trend, it started to exceed the long-term trend value in January 2024, and by October, the cyclical trend value had increased to 104.25, showing a gradual acceleration in growth in H2 2023, reflecting a stable recovery.

Looking at the year-on-year growth rate of this indicator, after turning positive in Q2 2023 at 1.73%, it further increased to 8.3% in Q3, and accelerated to 10.7% in Q4. In Q1 2024, it reached 17.1%, maintaining strong growth in Q2 and Q3 2024 at 13.7% and 12%, respectively. These figures confirm that the cyclical trend continues its rapid recovery. This confirms the continued and robust recovery of the economic cycle.

Figure 9. Annual growth rate and cyclical trend of real GDP of Finance and Insurance Sector, 2020Q1~2024Q3

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

B. Coincident indicator series

a. The real GDP cyclical trend and actual values of the “Real GDP Index of Wholesale and Retail” have both been steadily rising for six consecutive quarters, indicating that the economy is gradually recovering and stabilizing.

The cyclical trend value of this indicator had been on a downward trend for two years before hitting a trough of 98.72 in March 2023. Since then, it has risen for six consecutive quarters, with growth accelerating slightly, reaching 101.83 by October 2024, reflecting the ongoing recovery of the sector.

The real GDP year-on-year growth rate for this sector showed negative growth in Q4 2022 and Q1 2023 but rebounded in Q2 2023 by 0.9%, followed by increases of 0.6% in Q3 and 3.0% in Q4. In 2024, growth continued with increases of 5.4%, 5.3%, and 4.6% in Q1, Q2, and Q3, respectively, confirming the steady recovery of this industry.

Figure 10. Annual growth rate and cyclical trend of real GDP Index of Wholesale and Retail, 2020Q1~2024Q3

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

b. After rising for 22 months, “Real GDP of the Accommodation and Catering Industry” reached its peak in June 2023. The cyclical trend has since declined for four consecutive quarters, and in Q2 and Q3 of 2024, the industry showed negative growth, signaling a shift from stagnation to a downturn.

The cyclical tendency of this sub-indicator hit the bottom in August 2021, leading the economic recovery. The cyclical index steadily rose from the trough of 93.08, surpassing the long-term trend value of 100 by September 2022. In June 2023, the cyclical index reached its peak at 104.40. It then reversed its rise and started to decline, with the cyclical trend value falling to 96.1 by October 2024, indicating signs of recession.

The actual annual growth was severely impacted by the pandemic, it once reached its lowest point at -30.5% in Q3 2021. It then started to rebound, but the growth rates in each quarter fluctuated. In Q3 2022 and Q2 2023, there were exceptionally high growth rates of 47.4% and 38%, respectively. In Q3, there’s still a 13.5% growth rate, and 10.6% in Q4, but slowed to 3.3% in Q1 2024, and even dropped to -0.7% and -3.1 in Q2 and Q3 respectively, indicating that the cyclical trend is slowing further, moving into decline.

Figure 11. The annual growth rate and circular trend of real GDP in the Accommodation and Catering Industry, 2020Q1~2024Q3

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 in Q4 2022. While there hasn’t been significant long-term cyclical fluctuation, it has returned above the long-term trend since December 2023, with 21 consecutive months of growth, indicating a stable economic recovery. However, since 2024, the pace of recovery has slowed.

The cyclical trend of this indicator has shown slight long-term fluctuations. It bottomed out and began to recover in January 2023, with the cyclical trend value reaching 100.06 in December, exceeding the long-term trend value (100). However, by October 2024, the cyclical trend value had only reached 100.96, indicating a slower pace of recovery.

The actual annual growth rate reached -0.8% in Q1 2023, followed by a recovery to 0.2% in Q2, 4.4% in Q3, and 6.0% in Q4. In 2024, the growth rates were 5.4% in Q1, 5.0% in Q2, and 3.4% in Q3, reflecting a gradual upward trend in the economy.

Figure 12. Annual GDP growth rate and cyclical tendency of Real Estate and Residential Service Industry, 2020Q1~2024Q3

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

d. The economic trend of Real consumption of “Residential Services, Utilities, and Other Fuel Industries” has shown long-term stability, though the cyclical trend started to slightly decline from October 2020. After 30 months, a 19-month recovery starting in April 2023, indicating a steady upward economic movement.

The cyclical trend of this indicator has fluctuated slightly in the long term, never experiencing negative growth, but the rate of growth still follows a “growth cycle.” The cyclical trend reached a peak in September 2020 with a value of 100.29, then gradually declined, reaching a trough of 99.76 in March 2023. By October 2024, the trend had risen to 100.33, with a slightly faster pace of recovery in 2024.

Furthermore, the real annual growth rate has shown growth each quarter since 2020, though with little fluctuation. Q2 2022 (0.9%) and Q3 2023 (1.1%) were historically low points. Q2 2024 saw a higher growth rate of 2.5%, the highest since 2021, followed by 2.2% in Q3, showing that despite maintaining positive year-on-year growth, the economic fluctuations have been minimal, and the cyclical trend has steadily rebounded since Q2 2023.

Figure 13. Real Consumption of Residential Services, Utilities, and Other Fuel Industries, 2020Q1~2024Q3

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

e. Number of employees in the Service Industry has been rising since July 2022, surpassing the long-term trend value (100) in June 2023. As of April 2024, the upward trend continued for 18 months, indicating growing labor demand, with increasing pressure on labor shortages. However, since May 2024, the growth rate has slowed, and the cyclical trend is showing signs of a potential downturn.

The cyclical trend of this indicator bottomed out in June 2022 at a value of 99.50. After this decline, the upward trend strengthened, surpassing the long-term trend value of 100 in June 2023. However, the growth rate has slowed, and by October 2024, the cyclical trend value was still at 100.22 but had been decreasing since May 2024.

Additionally, the real annual growth rate has been positive since December 2022, with growth rates gradually increasing from 0.1% in December 2022 to 2.5% in September and October 2023. By January 2024, monthly growth rates exceeded 2%. However, since February 2024, the growth rate has fallen below 2%, and by October 2024, it had slowed to 0.6%, reflecting concerns about slower employment growth due to increased labor shortages during the economic recovery.

Figure 14. The growth rate and cyclical tendency of The Number of Employees in the Service Industry, January 2020 to October 2024

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