TAIWAN: ALL EYES ON DOMESTIC DEMAND AS EXPORTS WEAKEN

• The external tailwind for Taiwan’s economic growth is fading. Exports have decelerated to 3.1% YoY in Q3 2018, a big fall from 11.2% in the last quarter. In addition, imports are increasing as Taiwanese companies push for investment, especially in machinery. Therefore, the net trade components could turn negative for GDP growth.
• Fortunately, domestic demand is helping. Investment is benefiting from a favourable base effect as its performance in H2 2017 was the worst in recent years. The surge of machinery imports at 21% YoY, notably from the US and Japan, is a sign of stronger fixed asset investment. Inward foreign direct investment (as shown in approved FDI) has increased 38% YoY YTD especially in the semiconductor industry. Beyond investment, consumption remains stable supported by higher government spending.
• As far as financial markets are concerned, Taiwan’s equity market is down 12% to 9,516 from the end of June, in line with global developments driven by tech stocks. The Formosa bond market is frozen with issuance falling 79% YoY to 2,102 USD million in Q3 2018 as the new regulation for foreign investment on Taiwanese lifers has raised uncertainties. For properties, mortgages are growing on the back of renewed price increase in Taipei City.
• On monetary policy, CBC Deputy Governor Yen Tzung-Ta mentioned that the impact of lax monetary policy on economy growth was limited under a low interest rate environment but we do not expect this to lead to a change in policy stance. With limited inflationary pressure and huge uncertainty stemming from the US-China trade war, we expect the CBC to maintain the status quo.
• All in all, Taiwan’s economic growth has remained resilient thanks to domestic demand even exports are fading. We expect Taiwan to grow 3.0% in Q3 2018 on the basis of favourable base effect for investment and higher fiscal spending ahead of the upcoming local elections in November. Beyond trade, the downside risk comes from the impact that prolonged sluggish wage growth could have on private consumption in the future.

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