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As the economy continues its rebound, there's a shift in the balance of risks from growth to inflation, prompting considerations for policy tightening. Our GDP growth forecast for 2024 remains steady at 3.5%. However, reflecting the impact of the April 3rd Hualien earthquake, we are revising our 2Q GDP forecast slightly down to 4.2% from 4.3%, while revising up 3Q GDP forecast to 3.1% from 3.0%. The major change in our forecast compared to one quarter ago is inflation. The 2024 CPI forecast has been adjusted to 2.2%, compared to the previous 1.7%. 2Q inflation is expected to remain elevated at 2.3% YoY.
Earthquake impact
The magnitude 7.2 earthquake that struck Hualien on April 3rd is the most significant seismic event in over 25 years since 1999. Thankfully, the epicentre of the quake is more than 100 kilometres away from key manufacturing centres like Hsinchu, Taichung, and Tainan. Major semiconductor companies have reported temporary production suspensions and personnel evacuations, with no major damages to manufacturing facilities. Leading companies have restored their production capacities within 24 hours, with minimal impact on supply. Furthermore, the inventory ratio in Taiwan’s semiconductor and overall manufacturing sector has remained above the historical par level of 1.0. This suggests that companies have sufficient inventories to cope with the current situation.
The Hualien earthquake coincides with two public holidays, potentially discouraging outdoor activities and temporarily dampening consumer spending. However, this effect is likely to be offset by a subsequent release of pent-up consumer demand. Past experiences, such as the 1999 earthquake, suggest that the impact on consumption is far milder than that on exports and investment. Meanwhile, with post-disaster reconstruction demand emerging, there is potential for construction investment to rebound in the latter part of this year.
Exports
We maintain our expectation for a moderate recovery in exports in 2Q. The S&P manufacturing PMI for Taiwan has shown further improvement, rising to 49.3 in March, edging close to the 50 mark. This also marks the highest reading in nearly two years since mid-2022. The CIER (Chung-Hua Institution for Economic Research) manufacturing PMI remained relatively subdued at 47.9 in March.
The cyclical upturn in the global semiconductor sector should continue to drive Taiwan’s exports in 2Q. There are reports suggesting that OpenAI is set to launch GPT-5 with enhanced capabilities around mid-year. As businesses ramp up their AI infrastructure to accommodate greater computational demand, there will be a surge in the need for high-performance logic chips and high-capacity servers, storage and memory chips in the short term. Additionally, the emergence of conversational AI products could accelerate the refresh cycles for PCs, smartphones, and other devices in the longer run.
Demand from China is likely to remain relatively weak, continuing to constrain the pace of Taiwan’s export recovery in 2Q. First, the weakness in China's property market has led to excess capacity in various industries such as cement and steel, curtailing its related imports demand. Second, China's semiconductor imports face tougher restrictions, as the US further tightened export regulations in March to impede China's access to advanced AI chips. Third, China intentionally reduces imports from Taiwan, such as suspending preferential tariff treatment for certain Taiwanese petrochemical products under the ECFA (Economic Cooperation Framework Agreement) in January.
Domestic demand
Domestically, consumption is expected to maintain resilient growth in 2Q, while investment is likely to bottom out. Among the forward-looking indicators, consumer confidence edged upward to 73.5 in March, the highest in two years since early-2022; the CIER PMI for the construction and real estate sector also posted a strong reading of 58.9 in March.
Real income conditions are expected to remain stable, bolstering consumption growth in 2Q. In January, the monthly minimum wage was raised to TWD27,470, marking a 4.1% increase compared to the previous year's TWD26,400. Wages for military personnel, government employees, and teachers were also raised by 4% in January. Further adjustments are likely to be determined during the mid-year minimum wage review, considering the hike in electricity prices and mounting inflationary pressures. The average regular earnings across all industries are expected to grow by 2.5-3.0% this year, a figure sufficient to offset the estimated CPI inflation rate of 2.2%.
The asset market rally is poised to support consumption through wealth effects. Sinyi residential property prices in the Taipei area recorded an 8.0% YoY growth in January and a further 9.2% in February. The TAIEX gained more than 10% YTD, surpassing the 20,000 threshold, buoyed by AI-related optimism. Land and properties constitute 30% of total assets held by Taiwanese households, while equities and mutual funds account for nearly 20%.
Inflation
CPI inflation is expected to remain elevated in 2Q. Services inflation is likely to remain the key driver, reflecting the electricity price hike and its passthrough effects.
In response to enduring losses at Taipower, the government has opted to increase electricity prices by an average of 11% in April. According to the central bank's estimations, a 10% hike in electricity prices would elevate the whole-year inflation by 0.27ppt, inclusive of a direct impact of 0.09ppt and an indirect impact of 0.18ppt. Taipower asserts that this adjustment, coupled with government subsidies, will yield revenues of TWD62.5bn and curtail annual losses to a range of TWD10-12bn. This alleviation is expected to obviate the necessity for further electricity price hikes for the remainder of the year. Nevertheless, considering Taiwan's imperative shift towards green energy, alongside challenges posed by climate change and energy security, electricity price reforms remain plausible over the long term.
Meanwhile, as elaborated earlier, wage growth has picked up due to minimum wage hikes, public sector wage increases, and higher corporate profits. It is worth noting the possibility of reinforced wage-price dynamics, which could sustain inflation at the 2% level.
Monetary policy
Policy rate is expected to remain stable at 2.00% in 2Q. The central bank (CBC) surprised markets by raising the discount rate by 12.5 bps to 2.00% during the March 21st meeting. The CBC stated that this move aimed to temper inflation expectations stemming from the electricity price hike in April. The governor also said that interest rates are already high and the room for further rate hikes is limited unless whole-year inflation exceeds 3%.
Tightening of non-rate measures remains possible. In addition to inflation, concerns over asset price overheating have emerged. The CBC governor recently issued cautionary statements regarding the stock market, characterizing the fervour for ETFs as "herd behaviour." Meanwhile, accompanying the property price rebound, housing mortgage loan growth at banks quickened to 8.0% YoY in February. Should this trend accelerate further, reaching double-digit rates, the CBC may contemplate tightening the LTV requirements pertaining to housing loans.
Geopolitics
Cross-strait developments will be closely watched, with the inauguration of the new Taiwanese president on May 20th. There's a possibility of China expanding the suspension of the ECFA to a broader range of Taiwanese export products. ECFA covered USD 15.8 bn worth of Taiwan’s export products in 2023, equivalent to 3.6% of Taiwan’s total exports. Cancellation of the tariff-free agreement under ECFA would affect goods trade across sectors including petrochemicals, machinery, textiles, and agricultural products. Another concern is the potential escalation of military exercises and associated activities. Such escalation could result in negative impacts on supply chains and lead to risk aversion in financial markets.
The potential scenario of a Trump 2.0 presidency is also worth considering. During Trump's term from 2016 to 2020, Taiwan maintained stable GDP growth of around 3%. Exports encountered challenges due to higher US tariffs on China-made products. Investment saw an uptick due to capital repatriation amid escalating tensions between China and the US. The net impact of the China-US trade war on Taiwan appears to have been neutral. Looking ahead, if Trump is re-elected, there could be risks associated with his implementation of universal tariffs on major trade partners. Taiwan ranks among the US's top 10 countries with trade deficits, recording a bilateral goods deficit of USD 47.7bn in 2023. The potential direct impact on Taiwan's trade resulting from Trump's tariff threats should not be neglected.
Source: https://www.dbs.com/in/sme/aics/templatedata/article/generic/data/en/GR/042024/240408_insights_taiwan.xml