Taiwan stands out for its successful handling of the coronavirus (Covid-19) pandemic, which has allowed it to avoid the more severe economic disruption seen among its regional peers.
Nevertheless, a closer examination of economic performance reveals that momentum is being driven primarily by stock-building activities. This has come in the absence of a corresponding recovery in either domestic or external demand.
High levels of inventory will weigh on economic performance later in 2020, as de-stocking reduces space for new production. This will complicate the near-term growth outlook, even as global demand recovers over the second half of the year.
As a result, The Economist Intelligence Unit has revised its forecast to expect Taiwanese real GDP to contract by 0.3% in 2020, from a fall of 2% previously. Growth will rebound to 1.4% in 2021 as external prospects firm and domestic economic activity normalises.
Taiwan’s successful mitigation of the coronavirus has allowed it to navigate the economic fallout of the pandemic relatively well. Although finalised statistics for April-June (released on August 14th) confirm that real GDP contracted in year-on-year terms, headline economic performance has been much more resilient than that of Taiwan’s regional peers. The economy expanded by an average of 0.8%, year on year, in the first half of 2020, a much sturdier performance than China (down by 1.6%, year on year), South Korea (-0.8%) and Japan (-5.8%) over the same six-month period.
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Nevertheless, there are emerging signs of stress. In real, non-seasonally adjusted terms, fixed-capital investment over January-June 2020 slowed to 2.7%, year on year, its weakest pace of growth since 2018, while household consumption posted its worst performance on record (-5%). Neither component was offset by government consumption, which fell by 1% over that six-month period, despite historically high growth in public expenditure (16.7%) tied to recent stimulus measures. Exports (-2.9%) and imports (-3.9%) of goods and services also fell, weighed down by weak global goods demand and tourism flows.
Instead, the momentum underpinning the economy to date has derived primarily from stock-building (a component under gross capital formation), with annual activity to June already reaching levels on a par with full-year 2018 (another year that saw strong stock-building activity). This has occurred in the absence of an equivalent firming of either domestic or external demand, highlighting the risk that domestic companies may be overproducing, based on overly optimistic expectations of consumer behaviour. This is also evident in monthly industrial production data, which suggest that industrial activity has outstripped domestic retail sales and goods export performance (by value) over January-June.
The consequences of this are already evident. Domestic overproduction has depressed producer prices and export prices since late 2018, a trend that has been exacerbated by rival production (and overcapacity) in China and South Korea. This stress has worsened since the economic fallout from the coronavirus outbreak: in April-June, producer prices (-11.3%) and export prices (-9.4%) posted their worst year-on-year quarterly performance in Taiwan’s history. We expect this trend to persist in 2020-24, particularly amid Chinese industrial policies aimed at increasing its own domestic production capacity in electronics (namely in integrated circuits—although these pressures will be most evident in low-end electronics sectors, owing to Taiwan’s leading edge in semiconductor device fabrication).
Price declines masked stronger performance in goods export growth by volume, the index of which grew by 1.5%, year on year, in the second quarter, against a fall of 5.9% in export values. This is positive for headline real GDP, which is supported by stronger export volumes. Weaker prices, however, will carry deeper consequences for Taiwanese corporate earnings, wage payments and debt-servicing activities—all of which are expected to come under pressure in 2020, despite government assistance. That will have a trickle effect on other parts of economic activity, including household consumption and corporate investment. It will also pose challenges to policymakers, including around suppressing the domestic unemployment rate and fortifying talent-attraction schemes under Taiwan’s own industrial policy goals.
The near-term outlook for the economy is mixed. We have adjusted up our forecast and now expect a shallower real-GDP contraction of 0.3% on average in 2020, against earlier expectations of a 2% fall in headline growth. Much of this will be sustained by an expected recovery in trade performance over the second half of 2020, which should re-introduce some elements of external demand, while the government’s Triple Stimulus Voucher programme should modestly help revive household consumption. Both factors should provide some space for companies to engage in de-stocking efforts amid the mass build-up of inventory in the first and second quarters.
This, however, will inevitably come at the cost of new production, which may, in turn, constrain some momentum underpinning broader economic growth. The trade recovery will also remain heavily reliant on a sustained economic recovery overseas (particularly in China, Taiwan’s largest trading partner) over the third and fourth quarters. Risks of future coronavirus outbreaks—by way of reintroducing mass shutdowns and disruptions to economic activity—could derail this trajectory, although this lies outside of our core forecast for now.
Despite a mild normalisation in quarter-on-quarter growth, we expect real GDP growth to fall back, in year-on-year terms, in the second half of the year. This will be driven primarily by the statistical impact of a high annual base of comparison from the same period in 2019, rather than any deterioration in macroeconomic conditions. As a result, even as the Taiwanese economy contracts over that period, economic fundamentals will remain sufficiently resilient. An expected uptick in growth in both China and the global economy in 2021 should help deliver a parallel rebound in Taiwanese headline performance, which will position the economy to grow (in real terms) by 1.4%.
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