The Economic Outlook of Taiwan by Ray Yeutien Chou and An-Chi Wu The Institute of Economics, Academia Sinica, Taipei October 2017 1
Prepared for Project LINK 2017 Fall Meeting, Geneva, Oct. 3-5, 2017 2
I. Introduction Since advanced economies are expected to remain on track with normal growth, as well as emerging and developing economies are maintaining momentum, the International Monetary Fund (IMF) has revised upwardly its forecasts of growth in global GDP and world trade volume to 3.5% and 4.0% respectively, for 2017. Especially, the Chinese economy has again exceeded the market expectation with a significant growth of 6.9% in the first half of 2017, reflecting strong demand from the US and Europe. Strong economic recovery has been building around the world, allowing the Fed to bring forward the next step of its policy normalization. As for Taiwan, the pace of economic growth in the first half of 2017 was higher than expectation because of unexpected buoyancy in exports and imports, driven by strong global demand. However, real private consumption and real private investment grew only 1.97% and 1.28% (year-on-year) respectively the first half of 2017, as reflected by stagnating real wages. As a result, the strong growth in external sector compensates the weak domestic demand, resulting in a moderate 2.39% economic growth in the first half of the year. A look at the second-half 2017, the growth of export orders and imports in July and August suggest that the momentum may persist in the second half of this year to support the external sector. Additionally, the continued expansion of government infrastructure projects in the future may help to make up for some part of depressed private investment. In the following, we briefly discuss recent economic performance and forecasts for each GDP component. II. Recent Economic Performance Taiwan s broad economic data for the first quarter of 2017 portray a promising outlook because of the strong performance of fixed capital and exports. However, stagnating real wages weigh on the growth of private consumption. The GDP increased 2.13% (year-to-year) in the second quarter of the year, which marked a deceleration from the 2.66% expansion in first quarter, but still expanded at a moderate pace owing to a strong external sector and weak private consumption growth. A. Consumption The real growth in private consumption was 1.88% and 2.05% (year-on-year) in the first and second quarter, respectively, supported by the accelerated economic growth but hampered by the slow growth in real wages. Private consumption grew only 3
1.97% (year-on-year) in the first half, lower than last year s 2.12% and the average growth over 2000 to 2007 (before the financial crisis). As a result, recovery of real private consumption has been tepid. Moreover, real government consumption didn t maintain the 3.13% growth it registered in 2016. The real government consumption experienced a negative growth of -4.73% in the first quarter, though it bounced back with a 0.82% increase in the second quarter. B. Investment Private investment grew by 3.53% (year-on-year) in the first quarter reflecting buoyant imports of capital equipment for twelve consecutive months. The year-on-year growth rate was -0.98% in Q2, reflecting a marked fall in imports of machineries and capital equipment. On the other hand, Government investment increased continually this year, at a pace faster than 2016 H2, growing 7.58% and 8.14% in the first and second quarter of 2017, respectively. The annual growth rate of investment in public utilities has significantly rebounded at a rate of 19.66% in 2017 Q1, due to a lower base year as well as adding on machinery and equipment investment. In 2017 Q2, the public utilities fell back to a rate of -0.85%, still remains a negative growth's pace of last year. Totally, real gross fixed capital formation expanded by 0.80% in the first half of 2017, largely attributed to the sharp decline in investment by private and government-owned enterprises. C. Exports and Imports Real exports and imports of goods and services grew by 7.36% and 7.67% (year-on-year) in first quarter, as well as grew by 4.97% and 4.37% in second quarter, respectively. Compared to the same period last year, where exports and imports rose 12.5% and 16.5% respectively in the first half of 2017. This growth was mainly driven by global demand for electronic components, basic metals and machinery, though the growth is partly attributable to a lower base last year. However, the trade volume still rose on the back of strong global demand for electronic gadgets as the world economy remained on a recovery track. Nominal exports and imports also have grown for eleven and twelves consecutive months in August, reflecting a recovery in external sector (in US dollars). China (including Hong Kong) continues to be the largest export market for Taiwan, accounting for 39.8% of exports in the first half of 2017. Exports to China surged 10.9% year-on-year (US$ 239 billion). The second and third major export destinations are the ASEAN and US, which accounted for 18.8% and 11.8% respectively of exports in the first half of 2017, growing 23.4% and 6.4% respectively year-on-year. 4
Industrial products continue to account for a very large proportion of exports, 78.10% of total export volume from January to July of 2017. Their total export volume increased by 14.3% compared with the same period in 2016. As for total volume of imports, raw materials account for the largest share (69.3%) from January to July of 2017, with an increase of 19.9% year-on-year. D. Money, Prices and Exchange rates The strong economy in the first half of the year resulted in accelerated advances by financial institutions, leading to modest growth in both narrow money supply M1B and broad money supply M2. M1B and M2 rose 5.07% (4.36%) and 3.53% (3.62%) respectively in the first (second) quarter. The consumer price index (CPI) rose 0.93% and 0.66% (year-on-year) in the first and second quarter, respectively, reflecting a continual decline in food prices while strengthening of NT dollar inhibited the import of inflation. The wholesale price index (WPI) rose 2.30% (year-on-year) in the first quarter of this year while it declined by -0.70% in the second quarter. Due to the recent weak performance of the US dollar, NT dollar appreciated to 30.02 to 30.50 in the first half of 2017. III. Future Prospects: 2017-2019 According to the latest forecast released by IMF, the world trade volume will grow 4.0% in both advanced economies and emerging markets and developing economies in 2017, a much better number than growth in 2015 and 2016. In the coming two years, we expect external pressures to ease due to recovery of the world economy. This should have a most pronounced reflection in the growth of exports and imports. Despite domestic private consumption and investment having been relatively sluggish, some forward-looking indicators, such as new orders and composite leading indicators, as well as measures of economic confidence, including consumer and business expectations surveys, have lifted, suggesting that the improved growth momentum could continue. In addition, the government reform package will stimulate consumption and investment at the same time. In sum, long-term growth prospects for Taiwan should continue to experience modest recovery. Therefore, according to the macroeconomic model of Academia Sinica, real GDP is forecast to grow by 2.17% in 2017, 2.42% in 2018 and 2.45% in 2019 with a strong exports outlook and public investment scaling up to lift the momentum. In the following, we discuss the major components of GDP. 5
A. Consumption The latest figures indicate that private consumption increased by 2.05% (year-on-year) in the second quarter, reflecting that domestic demand is still subdued, which is consistent with the slight growth in real wages in the first six months of 2017 (0.93%, year-on-year). The booming stock market has boosted local consumer confidence (Consumer confidence index, CCI, up 6.59% year-on-year in August). However, a working-day reform policy implemented for the labor market has only a short-term effect on consumption. As a result, we believe growth of private consumption will be modest in 2017 (1.87%), lower than the simple average of the past three years (2.57%). Moreover, a list of reform measures implemented by the government, including the 5% hike in minimum wage effective 2018 and pension and tax reforms may affect consumption in different ways. One the other hand, prices are expected to be more stable and businesses are likely to earn better profits, which together could have positive effects. We expect growth of private consumption to accelerate slightly from 1.87% in 2017 to 1.93% in 2018 and 2.05% in 2019, driven by edged up wages and a controlled inflation which is below 2%. Besides, growth of government consumption has been very weak. According to the government budget documents, government consumption is projected to decline by -0.55% in 2017 and rise 0.69% in 2018. B. Investment While private investment seems to have lost momentum, the latest indicators show signs of reversal. For example, PMI (Purchasing Managers' Index) has been in expansion territory for eight consecutive months, especially the indices of new orders and expectations of the next six months economic situation. The composite indicator of manufacturing performance stood at 54.3 in August, up from 53.6 in July, indicating that Taiwan's manufacturing sector remains in the expansionary territory. All these factors suggest that investment should revert to its normal pattern in the near future (around 2%). Private investment should still grow slightly in the second half of this year. According to the Directorate General of Budget, Accounting and Statistics (DGBAS), government investments are projected to rise by an annual 10.59 % in 2018, the biggest growth since 2009, as public infrastructure projects under the recently passed Special Budget Statute for Forward-Looking Infrastructure come on stream in 2017. This is expected to stimulate investment in 2017 to 2019. Consequently, we expect that the annual growth of gross fixed capital formation will increase by 2.10% in 2017, supported by the continuing investment in semiconductor manufacturing and 6
government s policies encouraging business investments and innovation. Furthermore, the average annual growth of gross fixed capital formation will increase 2.46% in 2018 and 2.84% in 2019, mainly on the back of a surge in public investment, aided by the government s infrastructure spending program. C. Exports and Imports According to the Ministry of Economic Affairs (MOEA), the industrial production index rose 2.38% in July, on the back of strong global demand for electronic gadgets. At the same time, production of electronic components rose 5.64% from a year earlier, with semiconductor and flat panels output increasing in the manufacturing sector. New orders growth rate is also maintained at 10.5% level. It is indicated that Taiwan has been benefiting from the upsurge in the global high-tech industry in the third quarter. Moreover, global economic fundamentals are expected to continue to improve as international electronics brands shall launch more new products later in the year. Therefore, the upward trends in both exports and imports are clear and suggest that the momentum is likely to continue in the coming years. We thus expect that exports and imports of goods and services shall grow by 4.07% and 3.70% respectively in 2017. Net exports of goods and services are projected to grow by 7.98%. In addition, the 2018 annual growth rates of exports and imports are forecasted to fall by growth of 2.85% and 2.63% as the fading prospects for US fiscal expansion. D. Money, Prices and Exchange rates Compared with the same period last year, M1B in the first 7 months of 2017 has increased at an annualized rate of 4.75%. Meanwhile, M2 expansion has declined to 3.70% annualized. This shows faster growth in demand deposits and net foreign capital outflows and slower growth in bank loans and investments. Moreover, it means the stock markets and funds may be more active in the third quarter of this year. The latest numbers are 4.96% and 3.6% for M1B and M2, respectively (Aug. 2017). Therefore, in 2017, money supply is expected to expand by 4.36% and 3.62%, respectively. The consumer price index has been subdued, which is attributed to the decline of prices of vegetables and eggs. The inflation rate was 0.67% and the core price index was up by 0.97%. Since crude oil price is expected to remain stable because of the cut of supply agreement by OPEC, inflation is likely to maintain its positive pattern through an average of 0.85% in 2017 and 1.03% in 2018, which is lower than 1.40% in 2016. WPI is expected to rise by 0.43% in 2017 and 0.98% in 2018 because of rising global demand. 7
Regarding the exchange rate, the USD/NTD stood at 30.15 in late August 2017 indicating a 7.76% appreciation since early in the year. The latest number is 30.01 as on 9/8. Therefore, considering the recent weak performance of US dollar, the exchange rate for NT dollar will remain in the range of 30.00 to 30.45 in the second half of 2017. IV. Policy Issues and Uncertainty Broadly speaking Taiwanese economy is seeing intensifying improvement in 2017, on the back of strong global demand. However, a number of issues can threaten slowdown of Taiwan s economic momentum, going forward. These include weak private consumption and fallout from ongoing labor, pension and tax reforms, as well as uncertainties stemming from the growing protectionism, geopolitical risks and impacts of the Federal Reserve policy, which could affect the only engine we have so far and that makes our economy more fragile. The issues and uncertainty including: A. Expectations of fiscal Expansion in the United States While the latest trade data are solid, uncertainty about trade policies of U.S. President Donald Trump remains a concern for Taiwan s export-reliant economy. The IMF has clearly stated that delay in implementing reforms is the key reason for downgrading US s 2018 growth forecast from 2.5% to 2.1%. Therefore, actions taken by the U.S. President Donald Trump pose the biggest uncertainty to the economy. B. The Rapid Credit Risks from China Taiwan s external trade is heavily dependent on China s domestic demand (the share of exports to China in total exports is around 39%). Exports to all major partners are declining and yet share of exports to China has been declining. Meanwhile, the Chinese economy expanded at an annual pace of 6.9% in the second quarter of 2017, beating its full-year target of around 6.5%, but it will slow in the second half of this year as demand in the US and Eurozone eases. On the other hand, the Chinese economy is likely to be affected adversely by rising debt and a slowdown in growth may lead to more dependence on policy stimulus. Taking these facts into account, we should be aware of the risk emanating from the close bond between Taiwan and China. C. The Fiscal Stimulus Enacted Program According to the National Development Council (NDC), the government has proposed the "Forward-Looking infrastructure development" budget in July 2017. The government's total investment in thise program over a four-year period is estimated at 8
NT$420 billion. A special fund of NT$108.90 billion (US$3.58 billion) has been allocated for phase one of the public infrastructure program from September 2017 to December of 2018. Meanwhile, according to the DGBAS report, government investments are projected to rise 10.59% in 2018, providing a coming stream for public infrastructure projects. The report also estimated that the panel expects growth to pick up slightly to 2.3% in 2018 on account of some fiscal stimulus being delivered; the projects shall contribute 0.1% to 1.7% to GDP. D. The Tax Reform For achieving a more desirable distribution of the tax burden, Taiwan s Ministry of Finance (MOF) announced new tax-reform legislation on 1 September 2017. Starting from 2018, MOF will raise the corporate income tax rate from 17% to 20%. It will also raise the tax rate on foreign investors share dividends from 20% to 21%, but lower the cap on personal income tax rate to 40% from 45%. The deductible for salary income will also increase substantially. This will affect the enthusiasm of investors in the short run, however, it will be conducive to private investment and consumption in the long term. V. Conclusion On the whole, Taiwan s economy showed intensified improvement in the first half, driven by strong global demand, and is expected to benefit from the global economy's stable pace of recovery in the second half. Particularly, mobile devices and gadgets used in the Internet of Things are expected to boost exports. However, the most important thing is that domestic exports are highly dependent upon demand from China, where increased financial volatility has been caused not by the divergence of monetary policies but by credit risks. This may turn out to be the downside risk for future growth. In the second place, President Donald Trump's turbulent foreign policy actions may challenge the global trade. Moreover, due to the subdued domestic demand, especially private consumption, the pace of growth is not yet back to the pre-financial crisis levels. The fiscal stimulus package should jolt public investment into life following six consecutive years of contraction and that may help shore up domestic demand. Taiwanese households will likely also benefit from rising wages and tax reform in the next few years. Despite the possibility of political uncertainties such as the direction of domestic investment and the timetable for major public infrastructure projects affecting growth, we forecast real GDP growth will pick up because the government's actions are a positive factor for policy continuity and implementation. Hence, the outlook for 9
Taiwan s economy remains cautiously optimistic this year. This moderate momentum for growth is expected to continue in the near future. 10