South Korea & Taiwan: Slower growth, peak rates
- The worse-than-expected 4Q22 GDP data have lowered the projection trajectories for 2023
- Tech exports are unlikely to turn around very soon
- The benefits of China reopening its tourism sectors should be limited
- We are downgrading South Korea and Taiwan’s 2023 GDP growth forecasts to 1.5% and 1.6%
- We maintain the forecasts for the two central banks to end tightening in 2Q
Worse-than-expected 4Q22 GDP data
South Korea and Taiwan reported a QoQ growth contraction in the final quarter of 2022. The preliminary estimate out this morning showed that South Korea’s real GDP shrank -1.5% QoQ saar in 4Q22, a further decline compared to the subpar 1.3% growth in 3Q22, and the first QoQ contraction seen since the pandemic outbreak in 3Q20. In Taiwan, real GDP registered a -4.2% QoQ saar contraction in 4Q22, partly reversing the strong 7.5% expansion in 3Q22. On the YoY basis, growth also slipped -0.9% in 4Q22, the first negative YoY reading since 2Q16.
Growth deterioration in South Korea was across exports and domestic demand. Exports of goods and services fell sharply by -21.2% QoQ saar in Oct-Dec22, outpacing the -17.1% decline in imports during the same period. As such, net exports deducted 3.1ppt from the headline growth in 4Q22. Meanwhile, private consumption also declined -1.7%, indicating that the post-Covid recovery in domestic demand has lost steam as consumers’ real disposable incomes were constrained by high inflation and high interest rates. Gross fixed capital formation maintained 2.7% growth in 4Q22, primarily driven by public investment. Private investment declined -0.9%, reflecting the downturn in the property sector and liquidity stress in the corporate bond market.
Taiwan’s GDP contraction was largely attributed to external factors. Exports of goods and services fell -5.1% YoY in Oct-Dec22, outpacing the -1.6% drop in imports by a wide margin. Net exports are estimated to deduct 2.7ppt from the headline growth in 4Q22 (8.5ppt, QoQ saar basis). In contrast, private consumption maintained an above-trend growth of 2.9% YoY in 4Q22 (DBSe: 16% QoQ saar), suggesting the normalisation in domestic demand after last year’s Omicron outbreak sustained momentum.
Lowering 2023 growth forecasts
The worse-than-expected 4Q22 GDP data have sharply lowered the projection trajectories for 2023. Without a strong and immediate rebound in 1Q23, the annual growth figures in 2023 will be negatively affected. The latest PMI surveys suggest that the sequential contraction in manufacturing activities in these two economies has stabilised since the end of 2022. Still, a rebound has yet to be in sight.
From a fundamental point of view, the tech-driven exports downcycle in South Korea and Taiwan may not turn around very soon. The global semiconductor sector is undergoing a typical cyclical adjustment characterized by a supply glut and price declines. Historical experiences suggest that inventory correction in the semiconductor sector will last for 2-4 quarters (see here for details). The current correction will likely continue into 1H23.
In South Korea, the headwinds weighing on domestic demand will likely persist through this year, considering the lagging impact of rate hikes and liquidity tightening. These include the hard landing risks in the property market and deleveraging pressures in the indebted corporate and household sectors (see here for details). The country’s property market downcycles typically take 2-3 years to complete.
China’s economic rebound may not translate into a full-fledged recovery in imports from South Korea and Taiwan in the near term. A normalisation of China’s consumption and investment demand and restoration of Chinese supply chains should help to lift the imports of intermediate goods from South Korea and Taiwan. Nonetheless, China’s access to advanced semiconductors will face restrictions due to the US’s recent broadening of export controls on chip sales to China, which took effect in Oct22.
Furthermore, the benefits of China reopening on South Korea’s and Taiwan’s tourism sectors will likely be limited. Beijing imposed a ban on mainland tourists visiting Taiwan in 2019 due to the deterioration in cross-Strait relations. It will likely retain the ban this year because of rising political uncertainties in the run-up to Taiwan’s next presidential elections in early-2024. China-South Korea ties also face new challenges as Seoul seeks closer collaboration with Washington on national security and defense. Recently, Seoul imposed screening measures against travelers arriving from China and suspended the issuance of tourism visas for Chinese travelers till end-January. China retaliated by suspending of all short-term visas for South Korean travelers.
Considering technical and fundamental factors, we are downgrading the annual GDP growth forecasts for South Korea and Taiwan. South Korea’s 2023 growth forecast is lowered to 1.5% from 1.8%, while Taiwan’s to 1.6% from 2.3%. Our base case forecasts imply a marginally positive QoQ growth in 1Q23, on-trend 2-3% growth in 2Q23, followed by a stronger recovery in 2H23. Under the bear case scenario of a technical recession (two consecutive quarters of QoQ contraction in 4Q22-1Q23), full-year growth in these two economies would fall further to around 1.0%.
Implications for monetary policy
The weaker-than-expected growth prospect bolsters our view that the central banks in South Korea and Taiwan will end monetary tightening in 2Q23. CPI numbers will likely ease more notably by then, thanks to a moderation of demand-side price pressures and the higher base effects caused by last year’s oil price spike.
These two central banks will still face a dilemma in the current quarter, as inflation remains elevated when growth starts to deteriorate. South Korea’s CPI inflation is expected to remain high at around 4% YoY in Jan-Mar23, due to the government’s 10% hike in electricity prices and festive demand during the Lunar New Year. Festive effects will also likely keep Taiwan’s CPI numbers above the 2% mark in Jan-Mar23.
We maintain our forecast for the Bank of Korea to hike one more 25bps at the February meeting and pause at 3.75% from April onwards. Our forecast also remains unchanged for Taiwan’s central bank to hike 12.5bps in March and pause at 1.875%. For the latter, we see a rising probability of an earlier-than-expected rate pause at the March meeting.
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