The Taiwanese economy stands out globally as one of the few likely to end the year with positive growth
Alicia Garcia Herrero, Natixis Asia Pacific Chief Economist, Bruegel Senior Fellow
As the world struggles to overcome the Covid-19 crisis, Taiwan has so far behaved as a rare oasis in as far as mobility restrictions to counteract the pandemic have remained very limited thought the year except for a couple of weeks in early February. Those early containment measures in February did slow down the Taiwanese economy and even more so the global lockdown in the second quarter, as shown by the recent publication of Taiwan’s second quarter GDP, which has turned out to be negative, but only slightly. Still, compared to the rest of the world, the Taiwanese economy has proven to be very resilient and prospects are positive for the second half of the year.
Looking at the situation of the Taiwanese economy in more detail, GDP growth has reverted from 1.59% in the first quarter of 2020 to -0.73% YoY in the second quarter. The main reason for the slow- down is consumption and exports while investment has remained strong. Fiscal policy has also helped but in a much more limited way than in many other countries, including Asia ones. Monetary policy has remained rather tight compared to most peers and so has the Taiwan dollar, which has gained ground within its limited general fluctuation. All in all, Taiwan’s GDP outcome for the second quarter should be considered very positive, relative to the rest of the world. The main reason is tht the shock has been much smaller, in terms of mobility constraints. In fact, hardly any mobility has been lost since the beginning of the year, which has limited the downward pressure on consumption. That said, labour market conditions do remain challenging, with a higher unemployment rate and an increased number of employees with reduced working hours, which is taking a toll in private consumption.
The escalation of the Covid-19 globally has also disrupted exports but much less than other competitors, such as Korea. The silver lining comes from investment, which has speeded up. This is not only public investment, but also private, as inward FDI has accelerated, reaching 4.6% of GDP, driven by repatriated profits being invested domestically, but also European FDI, especially in manufacturing and energy.
Despite the short-term turbulence, Taiwan’s economic outlook remains moderately optimistic. The first reason is there has not yet been a second wave of Covid-19, which differentiates Taiwan from the fate of Hong Kong, Japan or Singapore. Second, export orders of ICT and electronic products have sprung back significantly, and thirdly, corporate revenue has rebounded, which is particularly evident in the semiconductor sector. There are also early signs of a pick-up in financial, insurance and healthcare sectors. That said, more improvement is needed for a full rebound. Fourthly, the government is supporting consumption through vouchers and other means. Fifthly, investment — including from the private sector has remained very resilient and foreign direct invesmetn continues to increase. Lastly, home prices are growing again and there has been a narrowing of the decline in occupancy permits. Low vacancy rates for office space show demand coming from domestic and foreign investment and an uptick in industrial land prices signals demand from the manufacturing sector.
With a very mild impact of the Covid-19 on domestic mobility, Taiwan’s central bank is likely to keep its bullets unused for the time being, especially under the very low interest rate environment. Together with the better global risk sentiment and bigger foreign capital inflows, the Taiwan dollar has stood relatively strong. It is hard to see how this trend may change any time soon as it probably fits the central bank’s intentions. The reasons are two-fold. First, there is a risk of the US administration giving accusing Taiwan of currency manipulation. Second, exports have held up quite well given the circumstances. In any event, a very rapid appreciation of the Taiwan dollar is also not in the cards.
When moving to the future of the Taiwanese economy and how that changes as a consequence of Covid19, several aspects are worth considering. First of all, its dependence on the pandemic hardest hit sectors is relatively limited. The number of international tourists into Taiwan is low compared to Thailand, Hong Kong or even Singapore. Also the airline sector is not as relevant. Instead, ICT (including 5G related components) and biotech and key winning sectors for this pandemic, which gives Taiwan a comparative advantage in terms of export structure. Finally, the bet for green energy should also help make increase the productivity of the public investment that is being put on the economy to recover from the Pandemic. In other words, Taiwan has a good plan to investment in exactly when such investment is most needed. It is important, though, that such plans remain strong and that are not derailed due to seemingly more pressing needs, which however might be less productive. In other words, the necessary restructuring of non-productive companies should take its course and increasing openness to foreign competition should also be welcome. It is easier said than that at a time of enormous disruptions but that is exactly what will make the difference down the road.
All in all, I expect that Taiwan’s economy will grow positively this year, one of the very few bright spots globally, with 1.5% GDP in 2020 and 2.9% in 2021. The most immediate risk is a second wave of Covid-19, but a worsening global situation will also be detrimental even if Taiwan manages to isolate itself sanitarily speaking. More structurally, the ongoing global transition towards “Industry 4.0” will continue to lift demand for Taiwan’s 5G related exports and data centres. At same time, Taiwan’s green energy plan should continue to boost investment on top of the repatriation of profits from the rest of the world. With enough fiscal space — certainly compare to the rest of the world, and a specialization in winning sectors (tech and biotech), the outlook for the Taiwanese economy looks better than many others, notwithstanding Covid19.