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Business Cycle Forecast for Taiwan’s Commercial Service Industry

The "Big Flip" of the Service Industry Business Cycle

        Based on the latest GDP data of Q4 last year and the period before the revision released by the Directorate General of Budget, Accounting and Statistics (DGBAS) of Executive Yuan, our comprehensive business cycle index system analyzes and predicts the "big flip" of Taiwan’s service industry business cycle. The bottom was reached in April last year, and the forecast period will continue recovering until July this year.

Looking back at (press release 2020-12-4) the service industry’s comprehensive business cycle index system using actual data of 2020/Q3 to predict that the economic slowdown will continue until April 2021 at a much slower pace compared with the forecast (press release 2020-9-4) until the end of 2020. However, this time (press release 2021-3-5) our system based on the government’s latest GDP data of 2020/Q4 finds that the service industry’s business cycle has reached the bottom in April 2020, and current recovery is strong.

Under scrutiny of the original data sources, the government revised up the statistics from 2018 Q1 to 2020 Q2 when releasing the GDP data of 2020/Q3 last year.

Further reviewing the cyclical analysis forecast by our system during last year's pandemic, using the original data (before the revision) of 2020/Q1 (see press release 2020-6-5), 2020/Q2 (see press release 2020-9-4) and 2020/Q3 (see press release 2020-12-4) respectively shows that the economic trend of the service industry will "gradually enter a recession interval" in the second half of last year, "economic downturn will continue until the end of the year" and "economic downturn will continue until April 2021 but at a much slower pace". These forecasts are clearly due to the impact of the pandemic. If we look further back at the analysis and forecasts in 2019, the 2019-12-5 press release used the 2019/Q3 data to "forecast economic downturn will continue until April 2020 but 2020 will have optimistic outlook" and the 2020-3-5 press release used the 2019/Q4 data  “Overall turn upward across the coincident composite index”. So it is clear that the strong rebound in 2019 Q4 has turned the outlook to optimistic earlier.

Above tremendous fluctuations reflect the complex impact from pandemic, the US-China trade war, Taiwanese Companies and manufacturing back home, government bailout plans, and digital economy taking off. That still clearly shows the extreme uncertainty, toughness, and flexibility of Taiwan government and private governance and resilience. Finally, the trend has been back on track after the government revised old data and released new data.

Last year (2020), Taiwan's overall GDP grew by 3.11%. In expense, it is mainly due to 20.1% growth of net export which contributed 2.69% economic growth and represents 86.5% of total contribution. Other government investment grew 7.3% which contributed 0.2%; government expense grew 2.61% and contributed 0.35%; private investment grew 3.23% and contributed to 0.6%; private expense decreased 2.37% and contributed -1.2%.

 In all industries, it is mainly due to industrial growth 6.11% which contributed to 2.18% (represents 70% of total contribution); service industry grew 1.18% which contributes to 0.74%; agriculture grew 1.33% which is slightly higher than service industry and contributed to 0.02%.

 From a long-term observation, Taiwan's three-tier industrial structure, the service industry accounted for 68.78% from the peak in 2001, all the way down to 60.3% in 2020. At the same time, industrial sector accounted for 29.37% increasing to 37.87%. This development experience in advanced countries seems undoubtedly a trend of "reverse structural optimization." "Structure-Growth-Cycle" are intertwined, and there are still clear warning signs that should not be neglected.

 Commerce Development Research InstituteCDRIreleases the Business Cycle Coincident Composite Index for Taiwan Service Industry today (March 5th, 2021), shows although the economic situation is still hit by the pandemic, it had  gone through a one-year downturn period by April 2020 (from the peak in 2019 to the bottom in April 2020) and it has begun to upward. Coincident Composite Index had risen to the level of long-term trend in October 2020. It is predicted the cyclic trend will exceed the 0.4968 standard deviations of the long-term trend level in July 2021. Meanwhile, the Business Cycle Coincident Composite Index Peer also went through 22 months of decline in May 2020 (from the peak of 2018/7 to the bottom of 2020/5) is rebounding and rising. The two composite indexes of peers and leaders have risen, and the prospects are positive. As 2020 is full of abnormal phenomena, the global VUCA situation is still increasing, we should not be chaotic to face an unpredictable future.

The Fluctuations and Forecasts of Cyclical Coincident Composite Index

Figure 1. Business Cycle Peer Index Composite Index Trend and Prediction

 Explanation: According to the historical experience of this system, the change of the standardized cyclic composite index indicates that upward movements indicate rising business conditions (recovery), downward movements indicate falling business conditions (slowness or decline), between 0 and 1.5 σ indicates recovery, and more than 1.5 σ indicates prosperity; between 0 and negative 1.5 σ Slowness or recession, below 1.5 σ indicates depression.

a)    Cyclical Leading Composite Index for Service Industries The actual value has stopped rising and falling since August 2018. It has dropped from a peak of positive 0.2841 standard deviations to negative 0.1581 standard deviations in May 2020, and then returned to negative 0.0021 standard deviations in January this year.

b)    The composite index analysis and forecast of the overall business cycle of the commercial service industry was hit by the spread of pandemic in the first quarter of 2020. However, after the pandemic was controlled properly, the business cycle changes finally returned to the right track after one year. The changes in the standardized composite index are expressed in unit change standard deviations, from a positive 0.2393 standard deviation (σ) at the peak in April 2019 to a negative 0.1181 standard deviation (σ) at the bottom in April 2020. Then it rebounded significantly, and by January 2021 it had risen to a positive .2115 standard deviation. It is predicted that by July 2021, it will continue to rise by a positive 0.4968 standard deviation.

Appendix

Business Cycle Coincident Composite Index for Taiwan Service Sector

Year/Month

       

Deviation of Standardized Cyclical Coincident Composite Index

(unit:Benchmark: 0)

Remark

2021-07

0.4968

P

Use ARMA Model: (4,0)(0,0) to make predictions based on the leading effect set for half year

2021-06

0.4616

P

2021-05

0.4202

P

2021-04

0.3734

P

2021-03

0.3224

P

2021-02

0.2681

P

2021-01

0.2115

f

Peer indicator composite index extrapolated value

2020-12

0.1537

a

Peer indicator composite index extrapolated value

2020-11

0.0956

a

2020-10

0.0381

a

SourceBusiness Cycle Forecasting Team, CDRI

Note:

    a actual; f estimated; p predicted

Business Cycle Composite Index for Taiwan Service Industry

Figure
Business Cycle Composite Index for Taiwan Service Sector
Chart 1. Cyclical Leading Composite Index

Chart 2. Cyclical Coincident Composite Index


Source: Commerce Development Research Institute

   

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