- Exports are expected to return to single-digit growth, primarily propelled by tech exports
- Investment is likely to remain weak; consumption growth will gradually slow and normalize
- Inflation is expected to experience upward pressure due to food and oil prices
- GDP forecasts remain unchanged; inflation forecast for 2024 is revised to 1.7% from 1.4%
- Risks primarily stem from a global slowdown, China-US tech decoupling, cross-strait tensions
We anticipate a U-shaped growth recovery starting from 4Q onwards. GDP growth is projected to rise to around 2% YoY in 4Q, up from approximately 1% in 2Q-3Q. This growth is expected to accelerate to 3-4% starting from 1Q24. Our full-year GDP forecasts for 2023 and 2024 remain unchanged at 0.5% and 3.5%, respectively.
External sector
Exports are set to return to single-digit growth, primarily driven by tech exports. There are early signs of a cyclical recovery in tech exports from 4Q onwards. Tech exports, including electronic components, information and communication products, and precision instruments, registered a positive growth of 2.7% YoY in Jul-Aug, reversing the -9.3% decline in 3Q. Electronic components, though still in decline at -9.6% YoY in Jul-Aug, have slowed compared to -13.3% in 2Q. Information and communication products surged by 48.6% YoY, a substantial improvement from the 3.7% growth in 2Q.
In the global market, the prolonged challenges related to smartphone and PC inventories are expected to be resolved by 3Q/4Q, allowing major companies to introduce new product models and attract consumers to upgrade, thus accelerating the replacement cycle. Additionally, the adoption of ChatGPT is fuelling investments in generative AI, leading to increased demand for high-performance GPUs and optimized semiconductor devices. Taiwan is well-positioned to benefit from this surge in AI-related chip demand, given TSMC's prominent role in global advanced logic chip production.
On the other hand, Taiwan's non-tech exports have not shown clear signs of recovery. Non-tech exports continued to decline by -24.3% YoY in Jul-Aug, in line with the -26.8% decline in 3Q. Major non-tech products, including chemicals, metals, plastics, and rubber, have maintained double-digit declines.
The outlook for the recovery in non-tech exports appears lackluster. High debt levels in China may discourage rapid increases in property and infrastructure investments through traditional fiscal stimulus measures, which could impact global demand for industrial metals, construction materials, and other commodities.
Investment
The prospects for investment remain weak in 4Q. Ongoing destocking in Taiwan's manufacturing sector is expected to persist in 4Q, leading to inventory digestion by year-end and resumed production from 1Q24. The overall inventory-to-shipment ratio has eased to 1.3 in July from its peak of 1.5 in January but remains slightly higher than the historical norm of 1.0.
A recovery in machinery investment has yet to be in sight. While the capacity utilization rate in the manufacturing sector has improved, it has yet to be fully normalized. Capital goods imports declined further by -26.1% YoY in Jul-Aug, compared to the -17.9% drop in 2Q.
The residential property market is undergoing a correction phase due to rising interest rates and stricter loan-to-value rules. Building permits granted for construction decreased by -24.6% YoY in Jul-Aug, compared to -2.4% in 2Q. Banks' construction loans also slowed to 7.5% YoY in Jul-Aug, down from 8.9% in 2Q.
Notably, outward direct investment continues to outpace inward direct investment as Taiwanese companies actively diversify their supply chains. As of August, outward direct investment has seen YTD growth of 68.8% YoY, while inward direct investment declined by -26.9%. The US and ASEAN have become Taiwan's largest and second-largest outward direct investment destinations, contributing 37% and 20% of the total investment amounts, respectively.
Consumption
Consumption growth is expected to moderate in 4Q following a robust V-shaped recovery earlier in the year. The impact of post-Covid reopening has largely materialized. Heightened precautionary savings during the pandemic resulted in a 3.5ppt increase in the household savings rate between 2019 and 2021. Unleashing these savings will inject approximately TWD350bn into the economy, contributing 3.6ppt to annual consumption growth.
The impact of fiscal stimulus measures has also mostly materialized. The government distributed TWD6,000 cash handouts to each citizen in April, equivalent to TWD140bn injected into the economy, with an estimated boost to consumption growth of 0.6ppt.
In 1H, private consumption expenditures in the GDP account surged by 9.5% YoY, already surpassing the trend growth rate by 7ppt.
Property price declines may dampen consumption growth through the wealth effect channel. Recent data shows a -1.3% YoY drop in Sinyi property prices in Taipei in July, compared to a 3.4% increase in January. With the housing price-to-income ratio at an all-time high of 9.7, there is potential for further price correction in the coming quarters.
Despite these challenges, resilient labor market conditions are expected to support consumption growth at healthy levels. The unemployment rate fell to 3.4% sa in August, the lowest since January 2001, with strong job creation in the services sector contributing to sustained domestic consumption growth.
Inflation
Inflation is projected to remain above the 2% mark in 4Q. Our inflation forecast remains at 2.3% for this year, with the 2024 forecast revised upward to 1.7% from 1.4%.
Headline CPI rebounded to 2.4% YoY in Jul-Sep, compared to 2.0% in 2Q. Food prices increased significantly due to weather-related agricultural disruptions caused by typhoons, while transportation fees also showed a slightly faster pace of increase, reflecting the rebound in global oil prices.
Risks related to food inflation need close monitoring, with El Niño weather conditions potentially affecting typhoon activity in the western Pacific Ocean and leading to typhoon-related agricultural damage. Reduced rainfall and drought conditions in Southeast Asia and South America could disrupt crop cultivation, resulting in global food price hikes and impacting Taiwan's food inflation through the import channel.
Oil prices also present a significant risk due to the escalating conflicts in the Middle East. The focus is currently on Iran, a major oil producer and a key supporter of the Hamas group responsible for the recent attack on Israel. A retaliatory action by Israel against Iran could disrupt its oil supply. Additionally, there is the possibility of the US imposing stronger sanctions on Iran, which could further restrict its oil exports. Nevertheless, OPEC nations, including Saudi Arabia and the United Arab Emirates, still maintain spare capacity that they could utilize to stabilize oil prices. Furthermore, ongoing uncertainties in the Chinese economy could impact the outlook for oil demand and, subsequently, prices.
Monetary Policy
Taiwan's central bank (CBC) is expected to maintain a hawkish bias on monetary and credit policies. We anticipate that the benchmark discount rate will remain unchanged at 1.875% for the remainder of this year and through 2024. There is also a possibility of further tightening the loan-to-value ratio for mortgage loans in designated cities.
The CBC is closely monitoring inflation risks. In its economic forecasts for 2024 released in September, the CBC predicted an inflation rate of 1.8%, only slightly lower than the current year's 2.2%. Governor Yang has emphasized the need to remain vigilant regarding inflation, hinting at the possibility of a long-term structural increase in inflation to 1.5-2.0%, resulting in a rise in the neutral interest rate.
The CBC is also keeping a watchful eye on the credit market's risks. Consumer loans for housing purchases have rebounded to 4.9% YoY in Jul-Aug, despite previous rounds of LTV tightening in June. Banks' exposure to the real estate sector remains high, with housing mortgage loans and construction loans accounting for 37% of the total loan portfolio. Further tightening of LTV ratios to ensure financial stability is a possibility, but the CBC may want to see more convincing signs of economic growth recovery before implementing such measures.
Risks
While Taiwan's economy has successfully navigated the trough and is on a path to moderate recovery, potential downside risks include a global economic slowdown, US-China tech decoupling, and cross-strait tensions.
A more pronounced global slowdown could dampen consumer and business demand for electronics products. Challenges faced by consumers in the US and Europe due to high interest rates and tightening financial conditions, and difficulties in China's property market and labor market, could affect replacement demand for smartphones and PCs, making them sensitive to changes in global macroeconomic conditions.
An escalation in US-China tensions is another risk. Following export controls in October 2022, US chip companies like NVIDIA have continued to supply customized AI chips to the Chinese market. In parallel, Chinese electronics firms like Huawei and SMIC have made technological advancements, potentially leading to increased regulatory scrutiny and tighter export controls by the US, which could impact the global semiconductor sector's recovery.
Tensions between China and Taiwan represent an additional risk. Beijing's considerations to revoke parts or the entirety of the Economic Cooperation Framework Agreement (ECFA) could affect Taiwan's non-electronics exports to China. This would include agricultural goods, petrochemicals, textiles, machinery, and transportation equipment. Petrochemicals and machinery would be particularly affected due to their heavy reliance on the Chinese export market.
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Ma Tieying 馬鐵英, CFA
Senior Economist - Japan, South Korea, & Taiwan 經濟學家 - 日本, 南韓及台灣
[email protected]Topic
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