Taiwan in 2018/19: A broader, more palpable recovery
- A broader economic recovery, after two years of export-driven growth, is in the making
- Job/wage conditions are likely to improve further and the benefits will be felt more by citizens
- The central bank is expected to go slow on policy normalisation, amid a benign inflation outlook
- Risks: China’s deleveraging and slowdown, cross-strait ties, “America First” policy, and oil prices
- Taiwan-ASEAN ties are likely to strengthen in the next few years
Taiwan has maintained two consecutive years of recovery since coming out of the technical recession in 2015. We expect the ongoing cyclical recovery to be sustained for the third year in 2018, with GDP growth remaining steady at 2.5%.
Recovery will broaden in 2018 and the sources of growth will be more balanced, in our view. Higher growth this year has mainly been driven by external demand. Exports of goods and services is estimated to have grown 6.5% in 2017, the strongest in seven years. Net exports, therefore, contributed about 60% of the headline GDP growth in 2017. By contrast, among the key components of domestic demand, private consumption growth was just stable this year, while government consumption and gross fixed capital formation both contracted slightly.
As far as domestic demand is concerned, we expect private consumption growth to pick up notably to 2.4% in 2018 from 2.2% this year. Government consumption and gross fixed capital formation will also return to growth next year.
One of the pillars supporting domestic demand will be the government’s expansion of fiscal policy. Combining the general and special budgets, the central government’s total expenditures will increase 4.6% next year, the highest since the global financial crisis in 2009. Specifically, the government will launch the first phase of the four-year infrastructure construction programme. Public investment in areas
including transportation networks, water facilities, and digital infrastructure is set to increase.
Meanwhile, the government will also raise wages for civil servants, military personnel, and public-school teachers by 3% in 2018. This will be directly reflected as a rise in government consumption expenditures in the GDP account. It will also help bolster private consumption, offsetting the negative fallout from the pension reforms rolled out this year.
Notwithstanding Taiwan’s growth recovery, the central bank (CBC) is likely to go slow on monetary-policy normalisation. We expect the CBC to keep the benchmark discount rate unchanged at 1.375% in the first three quarters of 2018, before raising it by a modest 12.5bps in Q4. The discount rate is expected to be lifted further to 1.75% by end-2019, close to the level of 1.875% before the 2015 economic downturn.
Our baseline forecast – steady GDP growth, benign inflation, and still-low interest rates – suggests that the economy will be in a sweet spot in 2018. But downside risks to the growth outlook and upside risks to inflation remain. A faster-than-expected slowdown in the Chinese economy could easily drag Taiwan’s exports and overall growth, given Taiwan’s high dependence on the Chinese market.
The rise in oil prices is a distinct risk to the inflation outlook. Brent crude oil prices have risen faster than expected to surpass US$60/barrel since November 2017. Should oil prices stay at US$60-$65 in 2018 (10% higher than our baseline forecast), Taiwan’s CPI inflation will be boosted by 0.3ppt to nearly 1.5%. This could increase the pressure on the central bank to hike rates.
In addition, US President Donald Trump’s “America First” policies remain a challenge, from a longer-term perspective. The Trump government has refrained from restricting Asia’s exports to the US via tariff/currency measures this year. But it has reached an agreement with China to increase the imports of American goods/services. The tax-reform bill, which incorporates a sharp reduction in corporate tax to 20% from 35%, was also passed by the US Congress in December 2017. These policies may help boost the competitiveness of US exports/manufacturing in the long run. To Taiwan, this could mean more competition in the export market and more difficulties in attracting global FDI.
On the external front, a positive development is the strengthening of Taiwan-ASEAN ties. Taiwan’s outward direct investment in the ASEAN-6 countries surged 77% (YoY) in the first ten months of this year, reaching a cumulative of US$2.7bn. Exports to ASEAN-6 also grew strongly by 15%. Among Taiwan’s total ODI and total exports, the share of ASEAN-6 has risen to 17% (from 10% in 2016) and 18.3% (from 18.0%), respectively.
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