Taiwan: Tailwinds from global semiconductor demand but with a Dutch disease as a growing risk
With the tailwinds from exports, industrial production and investment have created a virtuous circle pushing growth above potential in Taiwan. However, the limelight on manufacturing may overshadow consumption, especially with any mobility restriction led by the Omicron.
Against the backdrop of fast global growth, Taiwan’s exports have surged to a record high in 2021 with a growth rate of 29%. Imports have grown even faster than exports in H2 2021, led by machinery and electrical equipment for capacity expansion. Corporate revenue has grown 16% in 2021, not only supported by the booming semiconductor industry but also transportation (high shipping costs) and materials.
However, consumption may see short-term challenges with renewed Covid cases. Even though the job market has improved, the number of employees with unpaid leaves or reduced working hours in the services sector remains high. If mobility is restricted again, Taiwan’s economy may face higher risk of a Dutch disease, which means a specific sector lifts prices and the rest of the economy cannot catch up, which can fuel competitiveness problems for other sectors and equality.
This divergence in growth has begun to affect wages and inflation. Sectors related to global trade (semiconductor and shipping) have enjoyed high wage growth, while the services sector is in a parallel universe. We cannot forget the services sector has created more new jobs than manufacturing over years, despite the latter has bigger value-added. More pressure is now seen in food prices, but the core inflation also shot up by 1.84% in Dec 2021. In the same vein, home prices grew 7.4% YoY in Nov 2021, creating additional gap among households able to invest and those without enough disposable income to do so.
Regarding net capital flows, foreign investors bought $21 billion into Taiwan in 2021 but with equity outflows of $16 billion, showing the strong demand for direct investment. The CBC may start discussing the timing for hiking rates, but it will depend on the FED’s pace. We expect the tightening magnitude to be mild in any case as policy makers believes rate hikes may bring unnecessary pressure to firms already negatively affected by the Covid-19 and prefer to use macro-prudential policies to curb home prices. For the TWD, the appreciation pressure may be less apparent in 2022 as Taiwanese firms seek more overseas investment due to the higher yields in the US and building chip plants.
As such, we expect Taiwan’s economy to close 2021 with a stellar growth of 6.2% and decelerate to 4% in 2022 (14% higher than 2019). Down the road, Taiwan is well positioned to capture the opportunities not only in semiconductors, but also in electric vehicles and the metaverse. Still, the positive outlook hides the looming risk of a Dutch disease, or a two-speed economy. A quick fix to limit this risk is for Taiwan to follow global trend and consider “living with virus”, especially after the vaccination rate reaches a comfortable level.
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