Taiwan’s local election results show the post-COVID honeymoon is over

Taiwan has been lucky in dodging a COVID-driven recession. Despite the early success of the epidemic prevention policy, the above-potential growth has not helped the Democratic Progressive Party (DPP) win the recent local elections. Without any big theme to woo voters, the turnout rate has plunged. The poor handling of local issues seems to have been instrumental in the election results. Taiwan's post-COVID honeymoon is now over, and a new era of challenges has only begun.

Riding the tailwind of faster-than-expected digitalization, Taiwan's export growth has lifted its economic growth. As a result, Taiwan’s GDP per capita has surpassed that of other tech powerhouses, such as South Korea and Japan. It has the highest proportion of manufacturing in Asia, contributing 34% of its GDP. The share of global chip exports has also surged from 10.2% in 2019 to 12.1% in 2021 and it is home to 70% for advanced chips (7nm and below). Supportive government policies have been boosting foreign direct investment, especially the green and high-tech manufacturing investment from Europe.

However, the real economic challenges have just begun. With the global tech cycle downturn, export growth has turned negative at -0.5% YoY in October 2022. The slowly ending zero-COVID policy in Mainland China affects Taiwan negatively and it forms 40% of exports. The higher interest rates globally have dampened consumer sentiment on consumer electronics, meaning firms will need until Q2 2022 to unwind their inventories. The hawkish FED and inflation are also pushing the CBC to hike rates, even though the pace will slow down for the sake of growth. The reopening of the economy has boosted consumption, but the impact will be temporary. Households’ sentiment may fall if growth slows down. As international travel resumes, Taiwan will see net tourism income outflows, which could hover around 5.2% of GDP.

From a more structural perspective, three major risks prevail. First, the slow wage growth means households may feel they have yet to gain from economic growth. And the divergence between semiconductors and finance compared to the rest may fuel income inequality, especially after the COVID shock. Second, the push for supply chain security means Taiwan may need to raise its outward investment, which may crowd out domestic investment. Third, the relationship with Mainland China will remain difficult and with increasingly real consequences, especially as concerns?the game changing chip ban from the US .

Even if the decelerating economy was not a major theme in the local elections, it is clearly relevant in the run-up to the general elections in 2024. With domestic and external headwinds, Taiwan's GDP growth will slow from 3.2% in 2022 to 2.6% in 2023. The manufacturing sector, especially the semiconductor ecosystem, has been the savior for years but the global downturn in the ICT cycle will hurt the economy. Both parties will need to pay attention to their economic plans beyond the China factor, especially for the middle class.

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