Economics DBS Focus Taiwan in 2018/19: A broader, more palpable recovery

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1 Economics DBS Focus Taiwan in 8/9: A broader, more palpable recovery Group Research 6 December Ma Tieying Economist Please direct distribution queries to Violet Lee violetleeyh@dbs.com Forecast summary 6 7F 8F 9F Growth, % yoy, ave.... Inflation, % yoy, ave..6.. Core inflation, % yoy, ave Monetary policy rate, % eop year yield, % eop Taiwan has maintained two consecutive years of recovery since coming out of the technical recession in. We expect the ongoing cyclical recovery to be sustained for the third year in 8, with GDP growth remaining steady at.%. A broader recovery with more balanced growth Key Themes: A broader economic recovery, after two years of export-driven growth, is in the making. Job/wage conditions are likely to improve further and the benefits will be felt more by ordinary citizens. The central bank is expected to go slow on monetary policy normalisation, amid a benign inflation outlook. Main risks: China s deleveraging and growth slowdown, weakness in crossstrait ties, Trump s America First policies, and a rise in oil prices. Taiwan-ASEAN ties are likely to strengthen in the next few years. Recovery will broaden in 8 and the sources of growth will be more balanced, in our view. Higher growth this year has mainly been driven by external demand. Exports of goods and services is estimated to have grown 6.% in 7, the strongest in seven years. Net exports, therefore, contributed about 6% of the headline GDP growth in 7. By contrast, among the key components of domestic demand, private consumption growth was just stable this year, while government consumption and gross fixed capital formation both contracted slightly. Taiwan: GDP growth & contributions % ppt, YoY Net exports Investment Govt consumption Private consumption GDP growth F 8F 9F Refer to important disclosures at the end of this report.

2 Forecast details 6 7F 8F GDP growth, % yoy, ave... Private consumption... Government consumption Gross fixed capital formation Exports of goods & services Imports of goods % services..9. We expect exports to grow.7% in 8, slower than this year but still a healthy pace. Electronics exports should remain strong in Q 8, given the encouraging ongoing sales results of the iphone X and the pattern of the Apple effect in the past. Demand for semiconductors and other electronics components will likely remain buoyant in the later part of 8. While the Apple effect will fade by then, new demand would come from the expansion of Artificial Intelligence, Internet of Things, autonomous driving technology, and deployment of the G network. IT research firm Gartner projects worldwide semiconductor revenue to grow % in 8, on top of a very strong 9.7% this year. Taiwan: Electronics exports USD bn iphone iphone X In the non-electronics sector, a further improvement in the global economy and a rebound in commodity prices are expected to provide a lift to Taiwan s exports. Global commodity prices have started to recover from the - slump, which bodes well for Taiwan s exports of petrochemicals, metals, and other industrial materials. These products account for about one quarter of Taiwan s total exports. As far as domestic demand is concerned, we expect private consumption growth to pick up notably to.% in 8 from.% this year. Government consumption and gross fixed capital formation will also return to growth next year. One of the pillars supporting domestic demand will be the government s expansion of fiscal policy. Combining the general and special budgets, the central government s total expenditures will increase.6% next year, the highest since the global financial crisis in 9. Specifically, the government will launch the first phase of the four-year infrastructure construction programme. Public investment in areas including transportation networks, water facilities, and digital infrastructure is set to increase. Taiwan: Central government's expenditure TWD bn 8 6 Level (LHS) Growth (RHS) % YoY F Meanwhile, the government will also raise wages for civil servants, military personnel, and public-school teachers by % in 8. This will be directly reflected as a rise in government consumption expenditures in the GDP account. It will also help bolster private consumption, offsetting the negative fallout from the pension reforms rolled out this year. The upcoming tax reform is expected to have neutral impact on domestic growth, on a net basis. While the proposal calls for a hike in the corporate tax rate to % from 7%, it will also cut the tax rate on companies retained earnings to % from %, and lower the top bracket of personal income tax to % from %. This reform will bring Taiwan s corporate and personal income tax rates closer to the global average (.% and.%, respectively). In addition, thanks to the modest monetary easing adopted by the central bank in -6, the credit and asset markets have shown inceptive signs of a recovery. Loan growth among all financial institutions has risen to about % (YoY) since May 7, up from the.% in December 6. Property prices have also stopped falling, registering a modest % (YoY) gain in the first three quarters of this year (Sinyi index). The lending/borrowing appetite will likely remain supported in 8, as monetary policy remains accommodative and the low interest rate environment persists (see the sections below). - Page

3 Labour market recovery to gather steam The benefits of an improving real economy will be felt more by households and individuals, through the labour market. On a seasonally-adjusted basis, the unemployment rate has already fallen to.7% as of October 7, returning to the lows and breaking the pre-gfc level of.8%. The improvement is even more notable if we factor in the rise in labour participation rate. Employment, as a share of working-age population, is now at the highest in two decades. Wage growth has also picked up. Regular wages increased.7% (YoY) in the first three quarters of this year. While this remains slow by regional standards, it is already close to the peak pace seen in Taiwan before the economic downturn and before the 8 GFC. Given the lagging nature of the labour market, companies will likely continue to increase hiring and raise pay in early-8. Meanwhile, monthly minimum wages will be raised by.7% in 8, the second consecutive year of increase, and a similar amount as the % delivered this year. This will benefit about % of the local workforce. All considered, we reckon that regular wage growth will pick up further to % next year. There is little urgency for the CBC to raise rates as the inflation outlook remains benign. CPI numbers have surprised on the downside this year, falling below % to about.6%. We expect CPI inflation to revert to.% in 8, mainly driven by energy and food prices. Global oil prices have bottomed out and recovered from the - slump, which should translate into a rise in Taiwan s energy import costs. Domestic food prices should also pick up on a YoY basis in 8, given the relatively favourable weather this year and low base effects. In our central case scenario, we assume oil prices will stay in the range of US$-$6/barrel in 8, and food inflation will return to the long-term average of %. Wage-driven inflation shouldn t be a big concern, in our view. Labour productivity growth is running at a steady pace of about %, enough to offset the % wage hike in our forecast. Productivity gains should help companies manage the unit labour costs and refrain from passing costs onto consumers. Taiwan: Inflation & interest rates % pa, % YoY.. Policy discount rate Y deposit rate CPI inflation Taiwan: Labour market indicators % YoY Regular wages (LHS) Unemployment rate (RHS) % sa The central bank will go slow on monetary policy normalisation Notwithstanding Taiwan s growth recovery, the central bank (CBC) is likely to go slow on monetarypolicy normalisation. We expect the CBC to keep the benchmark discount rate unchanged at.7% in the first three quarters of 8, before raising it by a modest.bps in Q. The discount rate is expected to be lifted further to.7% by end-9, close to the level of.87% before the economic downturn Main risks Our baseline forecast steady GDP growth, benign inflation, and still-low interest rates suggests that the economy will be in a sweet spot in 8. But downside risks to the growth outlook and upside risks to inflation remain. A faster-than-expected slowdown in the Chinese economy could easily drag Taiwan s exports and overall growth, given Taiwan s high dependence on the Chinese market. Exports to the mainland rebounded this year, thanks to China s inventory restocking and increase in fiscal spending. But the good fortune may not last in 8, as the Chinese authorities have tightened financial regulations and pushed deleveraging after the 9th Party Congress. Meanwhile, the weakness in crossstrait relations would continue to weigh on Taiwan s tourism sector. The number of Chinese tourists visiting Taiwan has been plunging for two Page

4 consecutive years in 6-7. There is little sign that China will loosen the controls on tour groups to Taiwan. The rise in oil prices is a distinct risk to the inflation outlook. Brent crude oil prices have risen faster than expected to surpass US$6/barrel since November 7. Should oil prices stay at US$6-$6 in 8 (% higher than our baseline forecast), Taiwan s CPI inflation will be boosted by.ppt to nearly.%. This could increase the pressure on the central bank to hike rates. In addition, US President Donald Trump s America First policies remain a challenge, from a longer-term perspective. The Trump government has refrained from restricting Asia s exports to the US via tariff/currency measures this year. But it has reached an agreement with China to increase the imports of American goods/services. The tax-reform bill, which incorporates a sharp reduction in corporate tax to % from %, was also passed by the US Congress in December 7. These policies may help boost the competitiveness of US exports/manufacturing in the long run. To Taiwan, this could mean more competition in the export market and more difficulties in attracting global FDI. Taiwan-ASEAN ties to continue strengthening On the external front, a positive development is the strengthening of Taiwan-ASEAN ties. Taiwan s outward direct investment in the ASEAN-6 countries surged 77% (YoY) in the first ten months of this year, reaching a cumulative of US$.7bn. Exports to ASEAN-6 also grew strongly by %. Among Taiwan s total ODI and total exports, the share of ASEAN-6 has risen to 7% (from % in 6) and 8.% (from 8.%), respectively. Given the prospects of most ASEAN countries to maintain steady growth in 8 and of China to slow, ASEAN s share in Taiwan s trade and investment is likely to increase further. Meanwhile, President Tsai Ing-wen s government will continue to push for the New Southbound Policy to encourage companies to diversify their trade and investment portfolios next year, such as increasing consulting services, expanding overseas loan/insurance support, and amending the investment protection agreements with Southeast Asian countries. Taiwan: Outward direct investment in ASEAN-6 Annual flow s, USD bn In terms of personnel exchange, the ties with ASEAN are also strengthening. The number of Southeast Asian tourists visiting Taiwan jumped % (YoY) in January-October 7, which is on track to reach a record mn this year. The number of foreign workers in Taiwan, mostly coming from Southeast Asia, has risen to a total of 67k as of October 7 (9% YoY). Against the backdrop of weak relations with China and a decline in Chinese tourists, Taiwan s government will likely continue to ease visa rules to attract visitors from Southeast Asia next year. Meanwhile, it is possible that the authorities will adopt a more open attitude to foreign worker policies in the next several years. Foreign workers currently account for % of Taiwan s population, still relatively low compared to the % share in Hong Kong and the % in Singapore. Given Taiwan s rapidly ageing population, introducing more foreign workers should be viewed positively for the economy in the longer term as it will help alleviate labour shortage and the supply-side growth bottlenecks. Related reports: [] Trump s policies & Taiwan, February 7 [] Trump and Taiwan, revisited, April 7 [] Taiwan: a closer look at the Southbound opportunities, October 7 Jan- Oct7 Page

5 Group Research Economics & Strategy Taimur Baig, Ph.D. Chief Economist - G & Asia taimurbaig@dbs.com Gundy Cahyadi Economist - Indonesia, Thailand, & Philippines gundycahyadi@dbs.com Radhika Rao Economist - Eurozone & India radhikarao@dbs.com Nathan Chow Strategist - China & Hong Kong nathanchow@dbs.com Irvin Seah Economist - Singapore, Malaysia, & Vietnam irvinseah@dbs.com Eugene Leow Rates Strategist - G & Asia eugeneleow@dbs.com Samuel Tse Economist - China & Hong Kong samueltse@dbs.com Chris Leung Economist - China & Hong Kong chrisleung@dbs.com Philip Wee FX Strategist - G & Asia philipwee@dbs.com Ma Tieying Economist - Japan, South Korea, & Taiwan matieying@dbs.com Sources: Data for all charts and tables are from CEIC, Bloomberg and DBS Group Research (forecasts and transformations). Disclaimer: The information herein is published by DBS Bank Ltd (the Company ). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation & the particular needs of any specific addressee. The information herein is published for the information of addressees only & is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company & its associates, their directors, officers and/or employees may have positions or other interests in, & may effect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & other banking or financial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts & tables are CEIC & Bloomberg unless otherwise specified. DBS Bank Ltd., Marina Blvd, Marina Bay Financial Center Tower, Singapore 898. Tel: Company Registration No. 9686E. Page