Taipei: Taiwan's manufacturing sector slipped into contraction in May, impacted by the stronger Taiwan dollar that squeezed the margins of export-oriented manufacturers, the Taiwan Institute of Economic Research (TIER) revealed on Tuesday. The TIER economic composite index, assessing the sector's health, dropped by 1.98 points from April to 9.88 in May, marking the first "blue light" in 15 months. This is the lowest since May 2023, when the index was at 9.81.
According to Focus Taiwan, TIER employs a five-color system to evaluate economic activity, where "red" indicates overheating, "yellow-red" signals fast growth, "green" represents stable growth, "yellow-blue" denotes sluggish growth, and "blue" indicates contraction. The blue light appearance is the first since February 2024, highlighting the impact of the Taiwan dollar's rapid appreciation against the U.S. dollar.
In May, the Taiwan dollar surged by NT$2.088, or nearly 7 percent, against the U.S. dollar. This surge was amid market speculations about U.S. pressure on Taiwan to let its currency appreciate due to ongoing trade and tariff negotiations. Despite this, Taiwan's central bank denied any pressure from Washington.
The TIER, using a Taiwan-dollar model, noted that the strong local currency caused export orders to rise by only 10.7 percent year-on-year in May, a sharp drop from April's 20.8 percent increase. However, in U.S. dollar terms, May's export orders saw an 18.5 percent rise, compared to a 19.8 percent rise in April. This discrepancy in currency-based calculations was evident in other economic metrics such as industrial production and exports, contributing to the composite index's sharp fall in Taiwan dollar terms. If the index were calculated in U.S. dollars, the sector would reflect a yellow-red light for May.
Among the index's five factors, three decreased from the previous month: pricing, demand, and raw material purchases sub-indexes fell by 1.62, 0.60, and 0.20 respectively. Conversely, the sub-indexes for costs and the general business climate rose by 0.37 and 0.07 respectively.
The TIER highlighted that uncertainties from the Trump administration's tariff threats further strained the manufacturing sector in May. Although the local tech sector benefited from the surge in artificial intelligence applications and cloud services, foreign exchange losses from the stronger Taiwan dollar countered gains from such technologies.
Consequently, the electronics component industry maintained a green light, while the computer and optoelectronics industry downgraded from yellow-red to green in May. Non-tech industries, however, were significantly affected by the Taiwan dollar's strength and tariff issues, with the base metal and chemical raw material industries both flashing blue lights in May due to fragile demand and intensified pricing competition.