Taiwan faced quasi-stagflation challenges this year, grappling with a global semiconductor downturn, trade recession, and elevated food and oil prices. A recovery is anticipated for the upcoming year, marked by significantly higher GDP growth and slightly lower inflation.

Macroeconomic outlook for 2024

GDP growth

GDP growth is projected to rebound to 3.5% in 2024, a marked improvement from the 1.1% recorded this year. The trajectory indicates elevated figures in the first half, with a robust YoY growth of 4-5% in 1Q-2Q, followed by a moderate 2.5% growth in 3Q-4Q.

Positive momentum is expected in exports and private investment, particularly in the semiconductor sector. Global forecasts, including those from WSTS, Gartner, and IDC, predict a significant recovery in the semiconductor market, with growth ranging from 13.1% to 20.2% in 2024, reversing the contraction experienced this year.

Taiwan's electronic component exports, constituting 40% of total exports, have shown a more moderate single-digit decline since September. The inventory-to-shipment ratio in the electronic component sector has declined to 1.4. Companies' efforts to enhance supply chain resilience may reduce the need for the ratio to fall to historical levels for restocking.

Private consumption is expected to slow down in 2024, following the surge in reopening demand witnessed this year.  Nevertheless, the fundamental support for consumption remains intact, driven by improved employment and income conditions. The seasonally-adjusted unemployment rate is currently at a two-decade low of 3.4%, and monthly minimum wages are set to increase by 4% in 2024.

Government consumption and public investment have the potential for expansion. The 2024 budget proposal reveals a 7.2% increase in the central government's total expenditures, outpacing a 5.0% growth in revenue. This results in a slightly wider fiscal deficit of TWD173bn, accounting for around 0.7% of GDP. Historical trends suggest that fiscal policy tends to become marginally expansionary after elections. In the election years between 2000 and 2020, the structural fiscal deficit increased by an average of 1 ppt.

Inflation

CPI inflation is forecasted to reach 1.7% in 2024, slightly lower than the 2.3% recorded this year but still above the long-term trend.

Energy prices still pose an inflation risk. Global crude oil prices are expected to remain stable at $75-80/barrel in 2024. Despite this stability, a potential domestic electricity price hike is on the horizon. While the state-owned CPC managed profit losses by adjusting fuel prices, Taipower, which increased electricity prices by 11% in April, faces substantial losses. Historical trends indicate a propensity for energy price hikes post-elections (e.g., 2008, 2012), with potential impacts of every 10% electricity price increase elevating CPI inflation by 0.1-0.2 ppt.

Food prices are expected to remain volatile due to the ongoing El Niño phenomenon until at least April 2024. El Niño's influence on typhoon patterns and reduced rainfall in key regions require close monitoring for potential impacts on food inflation.

Core inflation is projected to remain stable in 2024, considering tightening labor market conditions, the closure of a negative output gap, and accommodative monetary conditions. The M2 growth rate, exceeding the long-term average of 4.5% YoY, suggests steady underlying inflation in the coming year.

Credit conditions

The credit landscape is anticipated to improve in 2024, driven by a recovering economy and stable interest rates.

Corporate financing demand is expected to increase, in alignment with the recovery in corporate earnings and heightened capital spending requirements.

Household financing faces limitations. Household debt accounts for nearly 90% of Taiwan's GDP, with housing and construction loans making up almost 40% of banks' total loan portfolios. Authorities are likely to exercise vigilance, ready to implement credit control measures to ensure financial stability.

Capital flows

The overall external balance is forecasted to maintain stability in 2024, albeit with near-term volatility surrounding election periods.

The current account surplus is expected to remain steady at approximately 12% of GDP, factoring in the projected recovery in both exports and capital goods imports in 2024. Net FDI outflows are expected to increase, reflecting Taiwanese companies proactively diversifying supply chains. Conversely, net equity and bond outflows are expected to diminish, driven by the earnings recovery of Taiwanese tech companies and improved interest rate differentials with the USD.

The near-term outlook is clouded by uncertainties linked to upcoming elections, which historically contribute to notable volatility in portfolio capital flows. This volatility mirrors shifting risk sentiments associated with election outcomes, which carry significant implications for cross-strait relations.

Monetary policy

The central bank is expected to maintain a status quo on monetary policy, keeping the discount rate at 1.875% throughout 2024.

While potential rate cuts by the Fed might create room for Taiwan's central bank (CBC) to contemplate monetary easing, the presence of still-elevated inflation, a resurgence in household loans, and a recovering GDP growth could prompt the CBC to adopt a hawkish stance on monetary policy. Considering these factors, it is our perspective that the CBC is inclined to maintain a policy status quo.

Risks

Hard landing in US and Eurozone: There is a looming risk of a hard landing in the US and Eurozone economies in 2024, triggered by the delayed negative impact of monetary tightening. This could pose a significant challenge to Taiwan's export-driven economy.

Food and oil price surge: Escalating geopolitical conflicts and extreme weather events present a threat to global food and oil supplies. Given Taiwan's heavy reliance on cereal and oil imports, the nation would bear the brunt of increased inflationary pressures.

Geopolitical vulnerabilities: Taiwan is approaching presidential and legislative elections scheduled for January 13, 2024. The presidential race involves three prominent candidates: Mr. Lai Ching-te of the Democratic Progressive Party (DPP), Mr. Hou Yu-ih representing the Kuomintang (KMT), and Mr. Ko Wen-je as the nominee for the Taiwan People's Party (TPP). Recent polls indicate that Lai is leading as the frontrunner, closely followed by Hou, while Ko lags behind.

Beijing heightened tensions with its largest-ever military exercise near Taiwan in August 2022. Additionally, a trade investigation into Taiwan's restrictions on 2,455 products from China was initiated by Beijing earlier this year. Discussions are ongoing regarding the potential termination of tariff preferential treatments for Taiwan's exports to China under the Economic Cooperation Framework Agreement (ECFA).

As a trade-dependent economy, Taiwan faces increased vulnerability to supply chain disruptions resulting from geopolitical events. Meanwhile, Beijing's trade restriction measures pose a significant risk, considering China's role as Taiwan's largest export market and primary source of trade surplus.

Structural themes

Digital economy

Taiwan's semiconductor sector is poised to benefit significantly from the rising global demand for Artificial Intelligence (AI) in the coming years. Cloud service giants like Microsoft and Google are expected to increase AI investments in 2024 and beyond, driven by the growing popularity of generative AI. Leading companies such as Intel and Qualcomm are actively working on integrating high-performance computing into end-devices, paving the way for AI-enabled PCs and smartphones to debut in 2024.

Taiwan's established semiconductor supply chain positions it as a key player in the AI market. It is the world's largest wafer foundry, contributing nearly 70% of global total revenue. It also leads in IC assembly and testing globally and ranks second in IC design. With robust technological prowess, engineering expertise, and strong partnerships with the US, Japan, and Europe, Taiwan is poised to maintain competitiveness in the semiconductor value chain in the foreseeable future.

Digital services also exhibit strong growth potential. The aftermath of the pandemic saw a surge in online sales as a percentage of total retail sales, rising from 7.5% in 2019 to 11.5% in 2022. The number of e-payment users as a percentage of the total population experienced a significant increase from 23.5% in 2019 to 80% in 2022. Shifting lifestyles and increased digital investments following the pandemic are expected to persist, driving sustained growth in digital services in the coming years.

During the ongoing election campaign, the leading candidate, DPP’s Lai, has underscored the "Innovative Economy and Smart Nation" as a primary focus. Emphasis is placed on promoting the development of semiconductors, AI, digital public services, fintech, and entrepreneurship ecosystems, among other initiatives.

Green economy

Taiwan is set to prioritize the green energy transition in the coming years, aiming to address environmental concerns. The nation’s per capita CO2 emissions, at 11.5 tons in 2022, significantly exceed the global average of 4.8, ranking among the highest in Asia. Over 80% of Taiwan's electricity generation relies on fossil fuels, and heavy dependence on imported coal, petroleum, and natural gas makes it susceptible to global energy supply disruptions.

In a positive development, renewable energy increased by 7.9% YoY in the first three quarters of this year, reaching a new high of 8.7% of the total electricity supply, up from 8.3% in 2022. Despite progress, there is substantial room for growth compared to the 20% renewable energy contribution in many other Asian countries.

Taiwan still faces challenges in advancing its green energy agenda. It heavily relies on foreign investment for wind farm projects due to the absence of a mature domestic supply chain. Global demand for wind farms has surged, intensified by increased installations in European countries seeking alternatives to Russian natural gas post the Ukraine war. Limited global supply escalates competition, raising Taiwan's wind power costs.

There exists a subtle divergence in energy policies between the DPP and the opposition parties during the ongoing election campaign. The DPP’s Lai sets an ambitious goal of achieving a 30% share of renewables in the energy mix by 2030, coupled with the phasing-out of nuclear energy. In contrast, opposition candidates, Hou and Ko, advocate for an extended use of nuclear energy as part of Taiwan's energy mix in the coming years.

Silver economy

Taiwan's aging population creates rising opportunities for the healthcare, pharmaceuticals, and biotech industries. The acceleration of population aging is evident, resulting in a decline in total population growth from 0.2% in 2020 to 0% in 2030, followed by subsequent negative growth. Projections indicate a notable increase in the median age from 40.8 in 2020 to 46.2 in 2030.

Over the past decade, the proportion of healthcare expenditures within Taiwanese households' total expenses has steadily increased. This share surged further after pandemic, rising from 16% in 2019 to 17.8% in 2022. Despite this, healthcare expenditures represented 6.1% of Taiwan's GDP in 2021, still lower than the figures observed in Japan (11.3%) and South Korea (9.3%), indicating potential for further growth in the healthcare sector.

Persistent supply-side challenges include government regulation through the National Health Insurance system, which actively regulates prices to ensure affordability and accessibility of healthcare services and medications. Stringent regulations and approval processes for market entry pose obstacles for companies introducing new healthcare or pharmaceutical products.

In the ongoing election campaign, the opposition parties place relatively greater emphasis on healthcare reforms. Both the KMT’s Hou and the TPP’s Ko have committed to increasing healthcare expenditures to 8% of GDP. Ko additionally advocates for relaxing the self-pay healthcare market and expediting the approval process for new drugs and medical devices.

Taiwan-ASEAN Connectivity

The investment and trade ties between Taiwan and ASEAN are set to strengthen in the coming years, as Taiwanese companies strategically diversify their supply chains in response to pandemic challenges and escalating geopolitical risks.

In the first ten months of the current year, Taiwan's FDI in the ASEAN-6 countries surged by 18.2% YoY, totalling USD4.6 bn. Noteworthy investments include Quanta's USD50mn venture to establish its inaugural subsidiary in Vietnam, focusing on MacBook assembly. Vanguard International Semiconductor plans a USD2bn investment in a chip fabrication facility in Singapore, particularly for automobile chip production. Several Taiwanese Printed Circuit Board (PCB) companies are also expanding investments in Thailand.

Meanwhile, the ASEAN-6 countries' share of Taiwan's total exports rose to 17.1% in the first ten months of this year, solidifying its status as Taiwan's second-largest export market. Tourist arrivals from Southeast Asia witnessed an exceptional YoY surge of over 600%, reaching 1.7mn in the Jan-Oct period, making Southeast Asia as Taiwan's largest source of tourist arrivals.

There exists a subtle distinction between the DPP and the opposition parties regarding the emphasis on external investment and trade ties. DPP’s Lai is committed to advancing diversification towards emerging markets outside of China and developed markets, aiming to reduce dependence on mainland China. His vision includes establishing industrial parks in the Indo-Pacific region and overseas innovation centers in the US, Europe, Japan, and Southeast Asia, facilitating the global expansion of Taiwanese companies. He also supports initiatives such as joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and strengthening ties with Southeast Asia through the "New Southbound Policy." On the other hand, KMT’s Hou adopts a balanced approach. He proposes the transformation of Kinmen into a pivotal passenger and cargo hub connecting Taiwan and mainland China, as well as a gateway to enter the Southeast Asia market. Hou's approach seeks equilibrium between regional integration and cross-strait relations.Top of FormTop of Form


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