Taiwan’s economic data shows the cyclical tech downturn may linger

Given the close supply chains integration, Taiwan’s economy is highly dependent on global demand, and the world also reads the silicon island as an important barometer for international trade. At the current juncture, the performance of Taiwan's manufacturers offers a timely reading of?how the tech inventory cycle evolves . The disappointing news is Taiwan’s economy has contracted for two consecutive quarters, meaning short-term headwinds prevail in the global tech sector.

As the external headwinds remain severe, Taiwan's economy has decelerated further from -0.4% YoY in Q4 2022 to -3% YoY in Q1 2023 (Natixis forecast: -3.3%, market consensus: -0.6%). The divergence between the weak manufacturing sector and recovering services is likely to stay in the next few months, providing some buffers to the economy but also limiting the growth potential.

Regarding foreign trade, Taiwan's exports fell 19% YoY and imports declined 16% in Q1 2023. Export orders fell 21% YoY, dropping 16% YoY in the US (Taiwan’s biggest customer). Mainland China saw a contraction of 39% YoY as the economy recovers but with stress in manufacturing activities. The import decline also shows a slower pace in investment, especially as Taiwan heavily relies on foreign machinery.

As the aftermath of COVID-19 and the ongoing Ukraine-Russia war, the fear of supply chain disruptions has prompted firms to maintain a higher inventory level. As demand turns, selling the stocks in hand takes longer than in the past. Taiwan's PMI shows new orders have collapsed, manufacturers are reluctant to buy material and parts for production, and clients prioritize offloading inventories. The inventory-to-sales ratio rose from 76% in June 2022 to 100% in February 2023. It shows corporates struggle to sell finished products and cut inventories.

Domestically, Taiwan's consumer confidence has improved as the reopening has boosted household and tourism spending. The recovery in services is evident in the labor market with a significant decline of employees with unpaid leaves and reduced working hours, which is back to the level prior to July 2021 at the time of the largest COVID-19 outbreak in Taiwan. The mild and decelerating CPI growth also prevents Taiwan from any severe loss in real disposable income. While the poorer manufacturing performance may hurt income, the government cash handouts (NT$ 6000 per person) should support consumption, as it equates to a fiscal boost of 0.6% of GDP.

In conclusion,?Taiwan’s economy has hit a speedbump from weak global demand . Its export may take another quarter or two to revert, meaning Asia's and global tech demand may be in the same scenario. We revise down our growth projection to 1.7% in 2023 from the previous estimate of 2%, which is lower than the average of 4.2% in 2020-2022. The good news is inflation is easing and the CBC will have a strong reason to stop hiking interest rates. The pressure from the FED hawkishness and a strong USD also starts to dissipate and firms might be approaching the end of their destocking cycle.

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