Manufacturing sector weakens to contraction on stronger Taiwan dollar

Taipei, June 1 (CNA) Taiwan's manufacturing sector fell into contraction mode in May as a stronger Taiwan dollar eroded export-oriented manufacturers' margins, the Taiwan Institute of Economic Research (TIER) said Tuesday.

The TIER economic composite index, which gauges the manufacturing sector's health, fell 1.98 points from a month earlier to 9.88 in May, the lowest level since May 2023, when the index stood at 9.81, resulting in the index's first "blue light" in 15 months.

TIER uses a five-color system to assess economic activity in the sector, with "red" indicating overheating, "yellow-red" showing fast growth, "green" representing stable growth, "yellow-blue" signaling sluggish growth, and "blue" meaning contraction.

It was the local manufacturing sector's first blue light since February 2024, reflecting the blow caused by the rapid appreciation of the Taiwan dollar against the U.S. dollar, according to TIER, one of Taiwan's leading economic think tanks.

In May, the local currency soared NT$2.088, or nearly 7 percent, against the U.S. dollar amid market speculation that the U.S. had pressured Taiwan to allow its currency to appreciate as part of ongoing trade and tariff negotiations between the two sides.

The central bank denied, however, that it came under pressure from Washington.

The TIER, which uses a model denominated in Taiwan dollars, said that due to the strength of the local currency Taiwan's export orders rose only 10.7 percent from a year earlier in May, down sharply from a 20.8 percent year-on-year increase in April.

But in U.S. dollar terms, export orders rose 18.5 percent in May, compared with a 19.8 percent increase in April.

The wide gap in calculations based on different currencies was also seen in other economic data such as industrial production and exports, leading the May composite index to fall sharply in Taiwan dollar terms, the think tank said.

If the index was calculated under a U.S. dollar-denominated model, the manufacturing sector would have flashed a yellow-red light in May, it said.

Among the five factors in the May index, three moved lower from a month earlier, with the sub-indexes on pricing, demand and purchases of raw materials down 1.62, 0.60 and 0.20, respectively.

Bucking the downtrend, the sub-indexes on costs and the general business climate moved higher by 0.37 and 0.07, respectively, from a month earlier, the TIER said.

Uncertainties created by the Trump administration's tariff threats also added pressure on the local manufacturing sector in May, the TIER said.

While the local tech sector continued to benefit from the growing popularity of artificial intelligence applications and cloud services, foreign exchange losses caused by a stronger Taiwan dollar offset the effects from these emerging technologies, the TIER said.

Therefore, the electronics component industry continued to flash a green light in May, while the computer and optoelectronics industry saw its yellow-red light in April downgraded to a green light in May, the TIER said.

The think tank said non-tech industries bore the brunt of the Taiwan dollar's strength and tariff issues. The base metal industry flashed another blue light in May, as did the chemical raw material industry, which faced fragile demand and growing pricing competition.