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

【Abstract】

The Coincidental Cyclical Composite Index for Service Industry (CCCIS) in April 2023 showed a continuous recovery since May 2022, with an accelerating trend. The continued rise of CCCIS is still attributed to the ongoing increase in employment of the Service Sector and the Accommodation and Catering Industry.

The post-pandemic business forecast has also produced several noteworthy phenomena that require some further observations.

The rapid recovery of customer flow due to the lifting of restrictions has led to the dominance of the Accommodation and Catering Industry, resulting in an increased demand for employment in the Service Industry. This has led to a continuous rise in the “Coincidental Composite Index” of this indicator system, while most other indicators, even including leading sub-indicators except for the Transportation and Storage Industry, have continued to decline. This has created a unique phenomenon of “unbalanced recovery.” Due to the ongoing decline in leading composite indices, the future path of recovery is highly uncertain. The so-called uneven economic situation (both domestically and externally) is unstable, and sustainability is not guaranteed. This is something worth noting.

During the pandemic, Semiconductor and Electronics Industry in Taiwan demonstrated remarkable resilience due to its technological advantages and a particularly robust supply chain. This led to a miraculous growth against the prevailing trend, establishing Taiwan as the leading force among the Four Asian Tigers. However, after the pandemic, Taiwan has unfortunately faced the agony of consecutive declines in orders from abroad. Additionally, the pressure of rising costs caused by inflation has further exacerbated the situation. As a result, both Net Exports and Private Investment, along with Inventory Investment, have significantly decreased. This not only hampers short-term economic recovery but also acts as a hindrance to long-term economic growth momentum.

The factors currently contribute to economic growth show that although there is growth in the Service Industry, it is unable to offset the larger negative growth gap in the Industry. As a result, the economic growth rate for Q1 this year continued the downward trend from Q4 last year, decreasing from -0.78% to -2.87%.

The rapid advancement of the digital economy era shows that both the application of business technology and the innovative transformation of business models have significantly shaped the direction, scope, and structure of the new international economic and trade development. Both product and service trade are increasingly driven by the digital trading. We have discovered that whether it’s the development or execution of production and design, whether it’s undertaken by enterprises themselves or supported by government initiatives, the scope is no longer limited to B2B purposes. B2C not only fills the gaps in B2B but also enables precise, effective, and rapid achievement of various “data-driven” research and applications which are necessary for enterprises’ digital transformation and ESG sustainability transformation. In short, while striving to counter the threat of economic recession, it is crucial to accelerate investments related to the development of the digital economy for preventing Private Investment from stagnating or reverting to the old paths. We hereby emphasize this as a matter of urgency.

1. Comprehensive analysis and prediction

CDRI finds that the Coincidental Cyclical Composite Index for Service Industry (CCCIS) has bottom out in April 2022 of -0.3014 Standard Deviation. However, as of April 2023, the index has steadily risen to a positive value of 0.0259 Standard Deviations. It’s predicted that the index will continue to rebound and reach 0.2527 Standard Deviation by October 2023. (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 Q1 this year (2023) has declined to -2.87%. The growth rate contribution of Private Investment has shifted from positive to negative, with a growth rate of -2.16% and a contribution of -0.5%.

Private Consumption, which had the weakest growth contribution rate in the past, has not only reversed its growth rate but also emerged as the top contributor in terms of growth rate, with a growth rate of 6.48%.

Net Exports experienced the most significant decline in growth rate, surpassing the severity of Private Investment. Its growth rate is -33.36%, and its contribution is -5.44%.

Due to pessimistic economic expectations and rising costs, there was a substantial reduction in Inventory Investment, which resulted in a growth rate of -187.09% and a contribution of -0.66%. There is a clear trend of economic growth momentum shifting from external demand to domestic demand. Apart from significant growth and contribution from Private Consumption, Government Consumption has a growth rate of 3.73% and a contribution of 0.45%; Government Investment has a growth rate of 2.12% and a contribution of 0.02%; and Government-Operated Enterprise Investment has a growth rate of 26.23% and a contribution of 0.24%.

Export has always been the engine of Taiwan’s economic growth, but Taiwan’s economy is most heavily impacted by the weak international market demand. (See Table 2 below.)

From the perspective of industry, the growth rate contribution in Q1 2023 has also undergone major changes. The growth rate and contribution of the Service Industry have surpassed that of the Industry. The Service Industry has a growth rate of 0.56% and a contribution of 0.36%, while the Industry has a growth rate of -11.2% and a contribution of -4.12%. The overall economic decline is mainly attributed to a substantial decline in the Industry, with only a marginal growth in the Service Industry.

Table 2. Q1 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. Q1 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 prospering in Investment, Manufacturing, and Exports, while Private Consumption of products and services is extremely sluggish, 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 bottomed out in May 2020, and has been continuously increasing for 19 months until November 2021. Subsequently, it reached its peak and began to decline. The Leading Composite Index dropped from its peak of 0.8983 Standard Deviations in November 2021 to -1.2527 Standard Deviations in April of the current year (2023).

Looking at the diffusion situations of the leading indicators, only one of the seven sub-indicators, “Transportation and Storage Industry,” is on the rise.

The CCCIS has been directly affected by the pandemic, having fallen from its peak of 0.5669 Standard Deviations in August 2020, and turned negative starting in June 2021, reaching its lowest of -0.3014 Standard Deviations in April 2022. It then began to recover and reached a positive value of 0.0259 Standard Deviations in April of the current year (2023). It is predicted to continue rising to a positive value of 0.2527 Standard Deviations by October of this year. (See Figure 1 above and the attached appendix)

Furthermore, when observing the diffusion of the coincident indicators, three of the five sub-indicators are still declining. Only the sub-indicators of the Accommodation and Catering Industry and Number of employees in the Service Industry continue to rise, showing a relatively strong upward trend. This has contributed to the overall increase in the Coincidental Cyclical Composite Index for the Service Industry, presenting another type of uneven post-pandemic recovery.

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, being the only sector that shows a recovery in the leading indicators.

The cyclical tendency of this sub-indicator reached its lowest point in June 2021, with a value of 93.6. It has been steadily rising since then, reaching 110.7 in March 2023, and is projected to reach 112.1 in April. This indicates that the trend has been accelerating since H2 2022, and it had exceeded the long-term trend level of 100 in July last year.

However, the annual growth rate (YOY), calculated based on its actual value, has been negative from 2020 till now. It only turned positive at 4.03% since Q2 2021. However, it experienced a decline of 14.55% in Q3, followed by a slower decline in Q4. In Q2 2022, it returned to positive growth at 0.6%, followed by a significant growth of 16.26% in Q3, and a growth of 10.28% in Q4. In 2023, Q1 witnessed a substantial growth of 25.27%.

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

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

b. The momentum of Private Real Fixed Capital Formation has been weakening for 16 consecutive months, and in Q1 2023, it saw negative growth for the first time.

The cyclical tendency of this sub-indicator reached its peak in November 2021, with an index of 102.9. Since then, the rate of decline has been accelerating, and in September 2022, the index fell below the long-term trend value. In April 2023, it stood at 95.4. This indicates that the fervor of Private Investment driven by the return of Taiwanese businesses is cooling down, and it’s worth noting.

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 24.25%, but it has been gradually slowing down. In Q3 2022, it was only 0.05%, and in Q4, it was 3.96%. While in Q3 2023, it turned negative at -2.16%.

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

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

c. Rare surplus in “Net Balance of Trade in Services Revenue and Expenditure” is now showing a continued trend of slowing down and moving towards a deficit.

Taiwan’s Service Industry, which began to experience a trade surplus in Q2 2020, has encountered a reversal after 11 quarters. In Q1 2023, it has reemerged as a trade deficit, amounting to a deficit of 1.72 billion US dollars.

The cyclical tendency of this sub-indicator hit a trough in September 2019 and reached a peak in November 2021, followed by a slight decline. As of August 2022, the index was below the long-term trend value and was rapidly declining. Extrapolating to April 2023, it has further accelerated to 73.7. 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 coming to an end 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, the net Balance of Trade in services in Q1 2021 even hit a historical high, with a YoY growth rate of 637.31%. However, it dropped to 155.46% in Q2, 89.62% in Q3, and rebounded to 151.32% in Q4. It has since been slowing down continuously in 2022, with zero growth in Q3 and negative growth of 72.65% in Q4, and negative growth of 135.57% in Q1 this year.

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

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

d. Initial Acceptance of Unemployment Benefits (inverted) indicates a downward trend, suggesting a continued slowdown in overall labor demand.

The cyclical tendency of this sub-indicator reached its lowest value of 90.5 in May 2020, and then rose all the way, and had exceeded the long-term trend level of 100 in May 2021. It reached 108.2 in March 2022, indicating a rapid recovery in employment demand. However, it subsequently reversed and started declining. As of April 2023, the inverted Initial Acceptance of Unemployment Benefits stands at 90.3, 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.

Figure 6. Number of the initial acceptance of unemployment benefits (inverted) and the annual growth rate and cyclical trend January 2020 to April 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 peak and is now declining, affecting the continued expansion of employment.

The cyclical tendency of this sub-indicator reached its peak of 102.5 in November 2021. The cyclical trend index, which shifted from rising to falling, has been below the long-term trend since July 2022 and has fallen to 96.6 in April 2023, which indicates that the employment expansion of the Commercial Service Industry is in the decline.

Figure 7. Annual changes and cyclical trends in the net entry rate of Employees in the Commercial Service Industry, January 2020 to March 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 shown signs of slowing down.

The cyclical tendency of this sub-indicator started to rebound from the bottom in March 2020, reaching its peak October 2021, with an index of 108.4. 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 16 months. As of April 2023, it has dropped to 89.91. Nevertheless, the rate of decline has been easing since the end of 2022.

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 -24.7% and -19.2%, respectively. Subsequently, the negative growth rates were in single digits, with February, March, and April recording -8.4%, -2.84%, and -3.9% respectively.

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

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

g. Cyclical trend of Real GDP of Finance and Insurance Sector has experienced negative growth for four consecutive quarters, indicating an ongoing decline in the economy.

The cyclical tendency of this sub-indicator reached its peak at 103 in August 2021, and then turned downward, returning to the long-term trend value (100) in July 2020, with the decline rate gradually accelerating. As of April 2023, it has dropped to 95.3, indicating an unfavorable economic outlook.

Also, looking at the annual growth rate (YOY), it turned negative starting in Q2 last year, with a growth rate of -2.36%. In Q3, it further decreased to -5.43%, followed by -8.84% in Q4, and -4.33% in Q1 this year. This confirms the ongoing downward trend in the business cycle and the unfavorable situation of consistently remaining below the long-term trend for the past year.

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

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” continues to fluctuate downwards, with consecutive negative growth for two quarters.

The cyclical tendency of this sub-indicator reached its peak of 101.6 in July 2021. It has been declining since then and fell below the long-term trend value of 100 in July 2022, reaching 96.1 by April 2023. This indicates that the business cycle has been gradually slowing down since H2 2021, and the downward trend intensified in H2 2022.

Meanwhile, looking at the actual values annual growth rate, it experienced negative growth of 2.45% in Q3 2021. Although it returned to positive growth from Q4, the growth rate slowed significantly. In Q4 2022, the growth rate turned negative at -3.39%, and in Q1 2023, it further declined to -7.45%.

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

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 Q3 2021 and is continuing to accelerate.

The industry has been greatly impacted by the pandemic, but it has also experienced a rapid post-pandemic recovery. The cyclical tendency of this sub-indicator peaking in May 2019 at 103.9. It then steadily declined, reaching below the long-term trend value of 100 in June 2020, and hitting a low point of 94.2 in July 2021. From April to October 2023, the cyclic index has reached a high level of 107.9, indicating a significant deviation of 3.8 Standard Deviations if standardized. This reflects a post-pandemic recovery phenomenon in the economy.

The actual annual growth has been going down all the way since the growth of 8.53% in Q1 2021. -9.95% in Q2, and -29.53% in Q3. Q4 and Q1 last year increased slightly by 2.91% and 0.56% respectively. It wasn’t until Q2 and Q3 this year that they rose rapidly, with growth rates as high as 12.85% and 41.73% respectively. In Q4 2022 and Q1 2023, there was a growth of 7.04% and 14.68%, respectively.

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

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 saw consecutive negative growth for two quarters.

The cyclical tendency of this sub-indicator fluctuates slightly over the long-term. The index peaked in December 2020, with a value of 100.5 and then slightly decline. It was lower than the long-term trend (100) by April 2022, and the decline rate slightly intensified. It has continued to decrease and reached 99.2 in April 2023.

The actual annual growth rate has shown a continuing growth; however, it has slowed down since Q2 2021, the growth rate has weakened compared to previous periods. Q2 and Q3 only experienced growth rates of 1.76% and 0.42% respectively. Subsequently, the growth rate declined further from 1.76% in Q4 2021 to only 0.76% in Q3 2022, and even reached -0.29% in Q4. In Q1 2023, it was -0.09%. With consecutive negative growth rates for two quarters, there are clear signs of a slowdown in the business cycle, indicating a shift towards recession.

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

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

d. “Residential Services, Utilities, and Other Fuel Industries” continues to grow slightly while the business cycle trend turns downwards.

The cyclical tendency of this sub-indicator showed little long-term fluctuation. It reached the bottom in April 2019, with a value of 99.8, and then kept rising slightly before reaching its peak of 100.18 in May 2021. It then slightly declined all the way until April this year at 99.83.

Looking at the annual growth rate, positive 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 0.91% (in Q2 2022). In Q3 2022, there was a growth of 1.44%, followed by a growth of 1.32% in Q4. In Q1 2023, there was a growth of 1.45%.

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

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 continues to show a slight upward trend, alongside the recovery of the Accommodation and Catering Industry.

The business cycle trend of this indicator reached its peak in March 2020, with an index of 100.23. It then experienced a continuous decline until January 2022, reaching a trough of 99.71. During the downward period, the magnitude of the decline was not significant, which may be attributed to the stabilizing effect of government employment support policies during the pandemic. Subsequently, there was a gradual recovery, with the pace accelerating in H2 2022. In November 2022, the cyclical trend value returned to above the long-term trend, and as of April 2023, the cyclical index stood at 100.37.

Looking at the annual growth rate, positive growth was observed from January 2020 to April 2021, although the growth was very limited, with the highest monthly increase being less than 1%. From May 2021 to May 2022, negative growth was observed, with fluctuations between -1.94% (in June 2021) and -0.18% (in May 2022). Subsequently, the growth rate declined from 1.2% in June 2022 to -0.17% in November 2022, and then increased gradually from 0.07% in December 2022 to 1.47% in April 2023. (The growth rate of 1.47% is the highest recorded since January 2020).

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