Externally, Taiwan has faced three successive months of declining exports during what is usually the peak season. At home, a string of food scandals has undermined consumer confidence. Since the beginning of the year, officials have claimed that the economy was approaching the "golden intersection" enabling a market upswing, and that economic growth would reach four percent. But today, even the hope of maintaining the annual growth rate at two percent has vanished. For the first three quarters of 2013, the Taiwanese economy has been gloomy indeed.

Fortunately, after an entire quarter under a dark recessive cloud, Taiwan's economy is seeing the first rays of light, now that international trade has picked up.

Most of the forecasts for 2014, by the Directorate General for Budget, Accounting and Statistics (DGBAS), as well as various economic research institutes and foreign banks, project economic growth in excess of three percent, breaking the gloomy spell of "holding the line at two percent." (See Table)

In the eyes of several domestic and foreign financial experts, Taiwan even stands a chance at emerging as a dark horse among its Asian neighbors by "exceeding expectations."

Behind these promising, yet easily doubted, forecasts lie two key factors:

Increase in Rush Orders

First, thanks to the economic recovery in Europe and the United States, global trade is picking up. As a result, Taiwanese exports, which account for 70 percent of annual GDP, can be expected to rebound markedly.

According to World Trade Organization (WTO) forecasts, global trade will improve from an annual growth rate of 2.5 percent in 2013 to 4.5 percent in 2014, mainly due to stronger consumption in Europe and the United States. Experts further predict that the current surge in trade, led by the European and American markets, will cause demand for consumer electronics, electronics parts and precision machinery to recover markedly.

Undoubtedly, for Taiwan this would be like a good rain after a long drought.

In fact, several Taiwanese electronics makers including Foxconn Electronics and Quanta Computer have received rush orders from European and American customers who need to rebuild depleted inventories.

These rush orders are also restoring the confidence of company leaders. The Taiwan Institute of Economic Research (TIER) conducted a 2013 year-end survey that covered some 2,000 companies in Taiwan. In the high-tech industry and the services sector, more than 55 percent of the respondents were optimistic about the economy in 2014. More than half of the companies are planning to increase their investment in Taiwan in the coming year.

"In fact, Taiwan's export industries, particularly ICT, are still quite competitive. You shouldn't lose confidence in yourself just because of a temporary slump," says Leong Wai-ho, a senior regional economist with British banking group Barclays PLC.

Leong argues that the main reason Taiwanese exports have been on the decline since the third quarter of 2013 is that the United States is the final target market of Taiwan's high-tech industry. And because the US recently faced a government shutdown after lawmakers failed to approve a new budget, many large European and American corporations turned pessimistic about consumer market prospects, gradually reducing inventory levels. Against this backdrop, Taiwan's technology industry faced a lull or even a decline in orders during its traditional peak season ahead of the Christmas holidays.

However, now that the U.S. budget crisis is over and an economic recovery seems on the horizon, Taiwan has experienced a rush order effect toward the year's end. These new orders are expected to contribute to stronger Taiwanese export performance in the first quarter of 2014 at the earliest.

Rebounding exports help boost private consumer confidence, which again becomes a driving force for economic recovery.

Tony Phoo, senior economist with Standard Chartered Bank in Taipei, is quite upbeat about the coming year, predicting that consumer confidence will be much better than in 2013. He is also positive about the growth prospects of the island's service industry. With the easing of restrictions on the number of independent travelers from China, Phoo expects domestic consumption to grow more than 2 percent in 2014.

Investment Turns Hot

The export surge has become the basis for Taiwan's economic recovery next year. And growth in fixed asset investment, which has languished for a long time, stands a chance of further boosting economic growth.

Over the past few years, Taiwan faced tight government finances and a continued exodus of industry to cheaper locations abroad. As a result, growth of investment by the government, the private sector and foreign investors all slowed down considerably.

But according to the budget for fiscal year 2014 total government investment will rise by 10 percent. Moreover, the Executive Yuan is expected to amend the law to further relax investment regulations in order to finalize the launch of free trade pilot zones. Taiwan can expect to attract more private investment as the government takes the lead in major BOT infrastructure projects, such as the Taoyuan Aerotropolis and the Port of Kaohsiung Intercontinental Container Terminal.

Quite a number of companies are presently pondering setting up a presence in Taiwan or scouting for merger and acquisition opportunities. Apple, for instance, is slated to formally establish an R&D center for Asia in Taipei next year. Council for Economic Planning and Development Minister Kuan Chung-ming reveals that other well-known foreign technology firms and manufacturers will come to Taiwan to establish a presence in or after the first quarter of 2014.

Establishing a foothold in Taiwan or acquiring domestic companies makes sense for foreign enterprises because Taiwan is close to China and has a large reservoir of professional talent, yet it is cheaper than neighboring Hong Kong, Japan or South Korea.

"The Taiwanese economy faces many challenges, but also many opportunities," observed Curtis R. Carlson, president and CEO of SRI International (formerly Stanford Research Institute), during a recent visit to the island. As China transforms from the world's factory into a domestic demand-driven economy and the United States encourages manufacturers to return home, multinational corporations are beginning to readjust their location strategy in Asia.

The focus of foreign direct investment in Asia is gradually shifting from increasing production capacity toward R&D (products and services that fit into the Asian market) and capital, distribution and logistics. Amid this trend, Taiwan has an opportunity to play an important role.

Another feature of Taiwan that attracts foreign companies is that the island formally became the second offshore trading center for the Chinese renminbi in 2013 behind Hong Kong. Leong points out that the ratio of cross-strait trade deals that are settled in renminbi keeps rising, while issuance of Formosa bonds and other renminbi-denominated financial instruments has begun. International financial institutions therefore regard Taiwan as an emerging nexus for renminbi business opportunities.

Moving beyond 2014, Leong predicts that Taiwan will have the opportunity to attract more foreign financial institutions if it implements a favorable set of supervisory regulations and policies.

Beware the Competition from China, South Korea

In order to get its economy out of the doldrums, Taiwan still needs to overcome several severe obstacles.

Taiwan's electronics manufacturing industry, which has long served as economic growth driver, needs to deal with changes in global demand as well as dramatic and wide-ranging change within the industry itself. Well-known Taiwanese technology brands such as Acer and HTC lost global market share and had their profit margins squeezed in 2013 due to changing global market trends and strong competition from South Korean manufacturers.

South Korea, like Taiwan an exporter of high-tech electronics, has begun in recent years to aggressively develop semiconductor contract manufacturing, IC design and precision machinery. These are exactly the sectors where Taiwan has concentrated its strengths. South Korean manufacturers also benefit from the free trade agreements that Seoul signed in recent years with the United States and the European Union, and Seoul is currently negotiating a trade pact with China. The globally leading position of the standard-bearers of Taiwan's high-tech industry is therefore in jeopardy.

Chinese electronics makers who started out making low-end copycat products are also moving up the value chain, gradually transforming themselves. Already there is talk of a sizable "Red Supply Chain" as Chinese home-grown parts and components replace what used to be "Taiwan inside." The Chinese supply chain is virtually complete, ranging from brand products to parts and components, assembly, packaging and testing. As domestic competitors in China grow stronger, Taiwanese brand makers are finding it harder to survive in the Chinese market. But not only are Taiwanese products becoming less competitive in China, Taiwan-based suppliers, used to being indispensable in the global supply chain, are now seeing their dominant position threatened.

"Taiwan needs to beware of low economic growth becoming the new norm," warned Wu Chung-shu, chairman of the Chung-hua Institution for Economic Research (CIER), in the latest CIER economic forecast for 2014. Given Taiwan's highly export-dependent economy, the government must take the lead in creating a more open, more competitive investment environment. At the same time, it must use industrial policy to help Taiwanese enterprises upgrade or transform. Unless this happens, Taiwan might be replaced by new competitors, even if the global economy recovers, and it may slide into a prolonged period of stagnation.

Economic Growth Lacks Trickle-down Effect

Another major test for the Taiwanese economy is the income stagnation that has long plagued the island's wage and salary earners, in the face of constantly rising housing and commodity prices. While GDP posted minor growth in recent years, the man in the street does not feel he shares the fruits of economic growth. Growth of private consumption is therefore also severely limited.

In particular, with a warming of the global economy in 2014, rising prices for imported goods and an expected faster influx of foreign capital into Taiwan, various institutions forecast that inflation will continue to go up and most likely exceed a five-year high of 2 percent. Higher inflation brings a measure of uncertainty to Taiwan's real economy.

Generally speaking, many economists hold the view that the Taiwanese government should take advantage of the global economic turnaround to intensify negotiation efforts for free trade agreements with major trade partners and to attract foreign investment. On the home front, the government needs to formulate concrete industrial policies and make efforts to increase national income. At the same time, an excessive surge in asset prices must be prevented through relevant tax reforms and housing policy. Otherwise, citizens will not be able to truly "feel" that the economy is growing.

The New Year comes with a ray of hope for economic recovery. Now we need to see to it that it becomes a beam and not just a flicker.

Translated from the Chinese by Susanne Ganz