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Outlook improves. Annual economic growth accelerated in the third quarter, powered by strong private consumption, government spendin...

Economic Outlook For Taiwan, Republic of China (January 2020)





Outlook improves.
Annual economic growth accelerated in the third quarter, powered by strong private consumption, government spending and a resilient external sector. However, the economy likely lost momentum in Q4. Industrial output fell in October and the manufacturing PMI for November remained in contractionary territory, pointing to weaker business activity. Moreover, tourism figures dipped in October—likely hit by China’s attempts to curb visits to the island—although remained strong for the year to date. More positively, external trade remains robust, with Taiwan benefiting from trade diversion from China due to the U.S.-China trade war. Meanwhile, Taiwan goes to the polls in early January to elect a new president and legislature, with China relations at the forefront of voters’ minds. The pro-independence DPP looks likely to retain the presidency, which could have detrimental effects on the external sector going forward. Next year, economic growth is expected to slow slightly, in part due to waning growth in mainland China and the U.S., although trade diversion from China should support the economy. Tense relations with the mainland pose a downside risk to the outlook. FocusEconomics panelists forecast GDP growth of 2.1% in 2020, which is up 0.1 percentage points from last month’s forecast, and 2.2% in 2021.

Politics
On 11 January 2020, the Taiwanese electorate will head to the polls to elect a new president and legislative assembly, with cross-strait relations and events in Hong Kong at the forefront of voters’ minds. Incumbent Tsai Ing-wen of the independence-leaning Democratic Progressive Party (DPP) looks likely to retain her hold on the presidency, with recent polls indicating a widening lead over the Kuomintang (KMT), the China-friendly opposition party. This should mean a broad continuation of past policies. Measures such as Invest Taiwan—which aims to attract overseas investment via cheap loans and preferential tax rates—look likely to continue supporting growth and the labor market. Meanwhile, on the fiscal front, planned increases in infrastructure spending should benefit imports and fixed investment. That said, a continued push to reduce dependence on mainland China could affect the external sector somewhat owing to a potential economic backlash from authorities in Beijing. On this point, analysts at Goldman Sachs note: “Another macroeconomic implication in the event President Tsai wins a second term is potential headwinds to services exports, particularly tourism. Amid heightened crossstrait tensions, inbound Chinese tourism declined after her 2016 election. That said, the downside risk may be limited, given an already lowered share of mainland Chinese visitors within the total visitor arrivals.” If the KMT candidate Han Kuo-yu were to confound market expectations and win the presidential elections, this would likely lead to closer ties to China, potentially aiding the external and tourism sectors in the short-term. The KMT is also proposing to reduce infrastructure investment, which would likely dampen imports and fixed investment levels, while boosting government spending somewhat. Meanwhile, the race for all 113 seats of the legislature looks less clear cut, with the emergence of the Taiwan People’s Party likely to deny either the DPP or KMT a parliamentary majority. As such, even if the DPP wins the presidential race as predicted, the loss of its present majority could entail increased resistance to its attempts to pass proposed policies into law. Our panelists project that GDP will grow 2.1% in 2020, which is up 0.1 percentage points from last month’s estimate but down from the 2.6% growth averaged during President Tsai’s first term in office to date. In 2021, our panel sees GDP growth of 2.2%.

PMI Remains Depressed
The manufacturing Purchasing Managers’ Index (PMI), reported by IHS Markit, remained unchanged at 49.8 in November, once again coming in below the 50-threshold that signals deteriorating operating conditions in the manufacturing sector. The amount of new work received by manufacturers decreased in November for the 15th consecutive month. This came against the backdrop of weak customer demand weighing on both domestic and external sales, with production falling as a result. Furthermore, purchasing activity and backlogs declined, while employment figures were unchanged, putting an end to a fourmonth-long period of expansion. Regarding prices, output prices fell again in November, despite an increase in input costs. Annabel Fiddes, principal economist at IHS Markit, commented: “Businesses remain particularly vulnerable to a slowdown across the global economy. Data highlighted a solid decline in export sales amid reports of weaker demand across key markets like China, Japan, Europe and the US. The latest survey also suggests that this soft patch may extend into 2020 unless there is a meaningful pick-up in client demand.” FocusEconomics Consensus Forecast panelists expect fixed investment to expand 3.0% in 2020, which is down 0.1 percentage points from last month’s forecast. For 2021, participants expect fixed investment to increase 3.1%.

Industrial Production In Doldrums
Industrial output declined 2.9% in October compared to the same month a year earlier, sharper than the 0.7% decrease in September (previously reported: -0.8% year-on-year). The downturn in October was driven by a steeper fall in output in the manufacturing sector, which represents more than 90% of total industrial production. Moreover, a plunge in mining and quarrying output weighed on industrial output in October. More positively, however, output in the water supply sector increased for the second consecutive month in October. On a seasonally-adjusted month-on-month basis, industrial output flatlined in October, following a 2.2% drop in September. Annual average growth in industrial production, meanwhile, fell 0.8% in October, contrasting a 0.1% increase in September. FocusEconomics Consensus Forecast panelists expect industrial production to expand 1.5% in 2020, which is down 0.8 percentage points from last month’s forecast. For 2021, participants expect industrial output to grow 3.2%.


Exports and Imports Rebound
Merchandise exports increased 3.3% in November in annual terms, contrasting October’s 1.5% contraction. The rebound came amid a strong increase in ICT exports, although falling exports of metals, machinery, plastics and rubber moderated the overall reading. Exports to the U.S. continued to surge—up almost 17% this month after October’s near-18% increase—with year-todate results also showing the increased importance of the U.S. as a trading partner, likely linked to trade diversion from China. However, export orders— which typically lead actual exports by two to three months—decreased 3.5% in October, the latest month for which data is available, suggesting softer export momentum ahead. Meanwhile, merchandise imports rose 5.8% in November, contrasting the 4.1% decrease in October. The increase was primarily driven by a surge in machinery imports, which outweighed falling imports of electronic, mineral and chemical products. The trade surplus was USD 4.3 billion in November, down from the USD 4.7 billion figure observed in November 2018, but nonetheless up from the USD 4.0 billion surplus in the previous month. The 12-month trailing trade surplus decreased to USD 45.7 billion in November from USD 46.1 billion in October. Our panelists forecast that exports will expand 3.2% in 2020 and imports will rise 3.8%, bringing the trade surplus to USD 56.1 billion. In 2021, our panel expects exports will expand 0.8%, while imports will rise 1.0%, bringing down the trade surplus to USD 55.9 billion.


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