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 July 2024 has indicated a continuous recovery for 22 consecutive months and has reached 1.4369 Standard Deviations after being standardized. Although the growth has slightly slowed, it’s forecasted to continue rising to 2.0388 Standard Deviations by January 2025, surpassing the 1.8205 Standard Deviations seen in August 2007 before the Global Financial Crisis, entering a historically “prosperity” stage.

However, the Accommodation and Catering Industry, which led the post-pandemic recovery, ended its 21-month rising in May 2023 and has shown significant growth deceleration by March 2024, the cyclical trend value dropped below the long-term trend value (100), and continued to decline to 99.88 in July. Additionally, the Q2 2024 growth rate for the Accommodation and Catering Industry, published by the Directorate General of Budget, Accounting and Statistics, showed negative growth for the first time at -1.06% since Q4 2021, signaling a clear slowdown. Despite this, strong recovery in other sub-indicators, particularly Wholesale and Retail, has prevented any impact on the overall upward trend of the Commercial Service Industry.

With the economic up-ward fluctuations strengthening, all five sub-indicators of the CCCIS have reached their long-term trend values (100). However, the Accommodation and Catering Industry began to slow down and accelerate downward since June 2023. By July 2024, its cyclical trend value had dropped sharply from a peak of 103.37 in May last year to 98.88. This indicates that while the overall Service Industry recovery is at a steady pace, the Accommodation and Catering Industry has encountered a growth bottleneck, which is noteworthy.

The Leading Cyclical Composite Index for Service Industry (LCCIS) rebounded in May 2023, and the upward momentum has been keeping strengthen. By October 2023, it had exited the historical recession zone of -0.5 Standard Deviations, reaching 0.8769 Standard Deviations in July 2024, indicating that the business situations will further improve.

Among the seven sub-indicators, five of them have shown an obvious improvement in economic recovery, especially with the most significant being Private Real Fixed Capital Formation, which rebounded in November 2023, which growth momentum remains strong, with the actual growth rate for Q2 2024 reaching 6.46%. Other sub-indicators, including Net Service Trade Revenue and Expenditure, the Net Entry Rate of Employees in the Commercial Service Industry, the Stock Price Index for the Commercial Service Industry, and the Real GDP of Financial and Insurance Sectors also continue to rise. In spite of the Transportation and Storage Industry and the Initial Acceptance of Unemployment Benefits (inverted) continue to deteriorate, with moderate downward trend and with the cyclical trend index for the Transportation and Storage Industry at 102.79, which still above the long-term trend value (100).

There are some key points and policy implications regarding the changes in Business Forecast for Taiwan’s Commercial Service Industry in Q3 2024 as follows:

1. Both the CCCIS and LCCIS reached levels in July 2024 comparable to the historical highs seen before the Global Financial Crisis. The CCCIS reached +1.4369 Standard Deviations, approaching the “prosperity” level of +1.5 Standard Deviations and is forecasted to rise further to +2.0388 Standard Deviations by January 2025. Meanwhile, the LCCIS reached +0.8769 Standard Deviations in July 2024, nearing the pre-financial crisis high of +1.05 Standard Deviations. With a monthly growth rate of +0.17 Standard Deviations, this indicates that the Commercial Service Industry is undoubtedly entering a period of prosperity soon.

2. Before this prosperity period fully arrives, attention must be paid to potential “supply bottlenecks” caused by “structural imbalances” and “uneven recovery” in the economy. These bottlenecks may result in rising prices and costs for goods, raw materials, services, and even labor, leading to “spiral” inflation.

Additionally, disparities in asset return rates across sectors could encourage speculative behaviors, temporarily inflating “false demand” and ultimately leading to a possible “Bubble Crisis.” To mitigate these “false prosperity” syndromes, both of long-term structural monitoring is essential to detect abnormalities as early as possible, and in the short term, financial risks from rapidly accumulating debt due to false demand should be promptly addressed.

1. Comprehensive analysis and prediction

CDRI finds that the Coincidental Cyclical Composite Index for Service Industry (CCCIS) has bottom out in September 2022 of -0.9906 Standard Deviation. However, as of July 2024, the index has steadily risen to a positive value of 1.4369 Standard Deviations. It’s predicted that the index will continue to steadily increase and reach 2.0388 Standard Deviation by January 2025. It’s clearly seen that the economic recovery in the Commercial Service Industry is still robust, but the pace is slightly slower than previously predicted in Q4 this year. (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

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 0.8595 Standard Deviations in November 2021 to -0.7206 Standard Deviations in May 2023. It then steadily increased to -0.1233 Standard Deviations in January 2024, and further rose to 0.8769 Standard Deviations in July. The LCCIS has been rising for 14 consecutive months, and its growth rate is still increasing. This suggests that the economy is likely to keep improving over the next six months.

Among the individual sub-indicators, the “Real GDP of Transportation and Storage” and the “Initial Acceptance of Unemployment Benefits (inverted)” continue to decline, but at a very slow pace. This decline doesn’t affect the strong upward trend of the overall LCCIS.

The CCCIS has been directly affected by the pandemic, having fallen from its peak of 0.6421 Standard Deviations in September 2020, and turned negative starting in June 2021, reaching its lowest of -0.9906 Standard Deviations in September 2022. It then began to recover and reached a positive value of 0.0144 Standard Deviations in August 2023 and continued to rise to 1.4369 Standard Deviations in July 2024. It is predicted to continue rising to a positive value of 2.0388 Standard Deviations by January 2025. Although the growth rate is expected to ease in Q4 this year, it’s still certain that the Commercial Service Industry is poised for a sustainable and robust recovery. (See Figure 1 above and the attached appendix)

Among individual sub-indicators, the slow downward trend of the Accommodation and Catering Industry from H2 2023 is a new variable, but it has not yet had an impact on the basic trend of the 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 has declined for nine consecutive months. Although the decline is slight, the boom is still strong, but the real annual growth rate has slowed down for four consecutive quarters, so we should pay attention to the follow-up development.

The cyclical tendency of this sub-indicator started to decline after ending a 25-month upward streak in October 2023. As of July 2024, it has been decreasing for nine consecutive months, but the trend value is still at 102.79, so there’s no major concern yet.

However, the annual growth rate (YOY), calculated based on its actual value, reached as high as 36.56% in Q2 2023. However, it has slowed down continuously, and by Q2 2024, it had dropped to 8.45%. This shows that the previously strong economic growth is cooling down, and the declining growth rate is something to be cautious about.

Figure 3. The annual growth rate of Transportation and Storage GDP and business cycle trend, 2020Q1~2024Q2

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 has reversed and is rising. After experiencing five consecutive quarters of negative growth since 2023, it showed positive growth in Q2 this year. There is hope that a new wave of domestic investment will gradually recover.

The cyclical tendency of this sub-indicator turned negative in Q1 2023 and fell to -16.76% by Q4. Fortunately, the decline reduced to -7.52% in Q1 2024, and it turned positive to 6.46% in Q2, showing that the domestic investment boom is beginning to bring signs of recovery.

Figure 4. Annual growth rate and cyclical trend of Private Real Fixed Capital formation, 2020Q1~2024Q2

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 -370.53%YOY in Q4. However, in Q1 and Q2 2024, the decline slowed to -38.57% and -77.54%, respectively. The cyclical trend value stopped declining in September 2023, rising from 88.27 in August to 96.08 by July 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 $10.073 billion USD. This is equivalent to 10.62% of the total Merchandise Trade Surplus of $94.881 billion USD during the same period. The service sector had a $6.306 billion deficit in H1 2024, 13.86% of the $45.482 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 88.27. The trend reversed in September, and by July 2024, it had risen to 96.08.

Looking at its actual GDP value of the Net Service Trade, it turned negative in Q4 2022, with the decline worsening to -370.53% by Q4 2023. However, in H1 2024, the decline significantly slowed, with Q1 and Q2 showing drops of -38.57% and -77.54%, respectively. 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, 2020Q1~2024Q2

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 ease.

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 110.20, showing a rapid recovery in labor demand. However, it began to decline afterward. By May 2023, the Initial Acceptance of Unemployment Benefits (inverted) dropped below the long-term trend value of 100, reaching 94.40 in July 2024. This suggests that the demand for labor will continue to decrease, although the pace of the decline has started to slow down.

Figure 6. Number of the initial acceptance of unemployment benefits (inverted) and the annual growth rate and cyclical trend January 2020 to April 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 has reached its lowest point in January last year, and rise all the way, 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 96.68, then began to rise, reaching a cyclical trend value of 106.65 as of July 2024. This indicates a mild expansion in employment within the Commercial Services sector and has been rising strongly in the past six month.

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

The cyclical tendency of this sub-indicator has reached its peak in October 2021, with an index of 108.61, and started to decline, reaching a low of 96.43 in June 2023. Then it rebounded all the way. As of May, this year, it has returned to the long-term trend value (100), and the business cycle index reached 101.63 in July.

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. The index has been fluctuating within single-digit ranges since May 2023 until July 2024, indicating that its trend is still experiencing relatively mild fluctuations. However, the decline is noticeably slowing down, and there is hope for a prompt return to stable recovery.

Figure 8. The annual growth rate and circular trend of the Stock Price Index of the commercial service industry, January 2020 to July 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, reaching a record high of 105.81 by July 2024.

The cyclical tendency of this sub-indicator peaked at 103.08 in July 2021, then declined, falling below the long-term trend value of 100 in April 2022 and reaching a low of 96.29 in February 2023. After reversing and climbing back up, it rose to 105.81 by July 2024, with the pace of growth accelerating, showing a stable economic recovery.

Looking at its annual growth rate (YOY), it began to decline and turn negative in Q2 2022, with growth rates of -2.86%, -5.86%, and -9.82% for Q3 and Q4, respectively. By Q1 2023, the rate improved to -4.38%, turning positive in Q2 at 2.86%, 4.65% in Q3, and accelerating to 12.12% in Q4. Q1 2024 saw a further increase to 17.18%, and Q2 showed a growth rate of 15.93%. 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, 2020Q1~2024Q2

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 five consecutive quarters, indicating that the economy is gradually recovering and stabilizing.

The cyclical tendency of this sub-indicator reached its peak of 101.46 in April 2021. It has been declining since then and fell below the long-term trend value of 100 in June 2022, reaching a trough in March 2023 with a cyclical trend value of 98.51. It has since risen for five consecutive quarters, accelerating to 101.87 in July 2024, indicating a stable recovery.

Meanwhile, looking at the actual values annual growth rate. After declining by 4.13% in Q4 2022 and 7.01% in Q1 2023, there were subsequent increases of 1.03%, 0.73%, and 3.89% in Q2 to Q4, respectively, and rose by 5.46% in Q1 2024, 5.08% in Q2, indicating a stable recovery in the sector.

Figure 10. Annual growth rate and cyclical trend of real GDP Index of Wholesale and Retail, 2020Q1~2024Q2

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” hit the bottom in August 2021. However, it peaked in May 2023, and the cyclical trend has been declining for four consecutive quarters. In Q2 this year, it even showed negative growth, indicating a slowdown in the economic recovery.

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 93.65, surpassing the long-term trend value of 100 by September 2022. In May 2023, the cyclical index reached its peak at 103.37. It then reversed its rise and started to decline, with the cyclical trend value falling to 98.88 by July 2024, showing that the recovery has slowed and encountered obstacles.

The actual annual growth was severely impacted by the pandemic, it once reached 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 2022 and Q2 2023, there were exceptionally high growth rates of 45.01% and 35.96%, respectively. In Q3, there’s still a 13.53% growth rate, and 8.92% in Q4, but slowed to 3.18% in Q1 2024, and even dropped to -1.06% in Q2, indicating that the economic recovery is losing momentum.

Figure 11. The annual growth rate and circular trend of real GDP in the Accommodation and Catering Industry, 2020Q1~2024Q2

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, with six consecutive quarters of growth, indicating a stable economic recovery. However, since 2024, the pace of recovery has slowed.

The cyclical tendency of this sub-indicator fluctuates slightly over the long-term. The index peaked in November 2020, with a value of 100.67. 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 November 2022 with an index of 99.04. Since then, it has rebounded, and by September 2023, the cycle trend value was 100.02, above the long-term trend (100). However, by July 2024, the cycle trend value had only risen to 101.12, indicating that the pace of recovery has slowed.

The actual annual growth rate reached -0.21% in Q4 2022 and continue to rise, with growth rates increasing each quarter: 0.09% in Q1 2023, 1.35% in Q2, 5.46% in Q3, and 6.65% in Q4, and 5.10% in Q2 2024, indicating a stable recovery.

Figure 12. Annual GDP growth rate and cyclical tendency of Real Estate and Residential Service Industry, 2020Q1~2024Q2

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. However, after a slight decline for 21 months starting in August 2021, it has been rising for 15 months since May 2023, indicating a clear improvement in the economy.

The cyclical tendency of this sub-indicator showed little long-term fluctuation and has never experienced negative growth. It peaked in July 2021, reaching a cyclical trend value of 100.20. Subsequently, it gradually declined, hitting a trough in April 2023 at 99.84. As of July 2024, it has risen to 100.25, with the pace of recovery accelerating slightly this year.

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 Q4 2023, the growth rate has leaped to 2.06%, and in Q2 2024, the growth rate reached 2.70%, showing that while the long-term fluctuations remain modest, the economic trend has been improving since H2 last year.

Figure 13. Real Consumption of Residential Services, Utilities, and Other Fuel Industries, 2020Q1~2024Q2

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 been rising continuously since July 2022. By June 2023, it had returned above the long-term trend, and by July 2024, it had been rising for 25 consecutive months, indicating increased labor demand and growing pressure due to labor shortages. However, the pace of growth has slowed somewhat this year.

The business cycle trend of this indicator hit a trough in June 2022, with an index of 99.49. After the decline, it gradually started to rise, and by June 2023, the trend value exceeded the long-term trend of 100. Furthermore, the momentum has continued to strengthen, with the cyclical index reaching 100.44 in July 2024 (once standardized, it’ll reach a positive 2.2666 Standard Deviations). However, the pace of growth has slowed since the beginning of 2024.

Looking at the annual growth rate, it has been consistently positive since December 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). By January 2024, monthly growth rates exceeded 2%. However, from February 2024, the growth rate began to fall below 2%, slowing to 1.3% in April and 1% by July. This reflects that while labor demand is rising during the economic recovery, increased labor shortages are causing concerns about slower employment growth.

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