Taiwan GDP boosted by government spending
Taiwan's growth rate increased in the third quarter, thanks largely to government spending. But the economy may suffer if those investment taps are turned off
| 2.91% |
Taiwan GDP growth Q3From 2.4% in Q2 |
Government subsidies helping growth
Taiwan's GDP grew 2.91% in 3Q19, from 2.40% YoY in the previous quarter. It was mainly driven by a 3.68% YoY increase in government spending. We believe this spending includes subsidies to preferential investments, which has prompted some Taiwanese manufacturers to move their production lines from Mainland China to Taiwan. The Taiwanese administration estimated that the amount of investment could total TWD800 billion in 2019, which is around 4% of nominal GDP.
But the abnormality in the data shows that capital formation contracted by 1.01% YoY. We believe that these investments might only be registered and some of these factories have yet to be built. It's been reported that investors can find it difficult to have adequate electricity and water supplies and these investment gains may take time to be realised.
Net exports rebounded but only temporarily
The net export contribution was not bad. Exports and imports grew 4.23% YoY and 2.17% YoY respectively in 3Q19, better than the 4.13% and 3.68% in 2Q19.
However, it may not last. Smartphone sales have not been as good as expected after initial orders. Taiwan, which depends very much on Apple devices, will be hit directly in terms of production as well as exports.
So we expect exports' contribution to 4Q19 growth to subside.
Consumption benefits from a low base
Growth in consumption was 1.48% YoY in 3Q19, which was mainly from a low base effect last year of 1.11% YoY in 3Q18. It was, however, still slower than the 1.86% YoY in 2Q19.
There won't be much consumption upside if salaries stagnate should trade activities and the production of smartphones and their related parts slow. And whether the preferential investment scheme can actually turn into production activities, and therefore increase demand for workers, is uncertain.
Forecast
GDP growth is expected to slow with the ongoing US-China trade war and sluggish demand for new smartphones. Our GDP growth forecasts are 2.8% YoY in 4Q19, thanks to the low base effect last year, then moderating to 1.9% YoY, 1.8%, 1.2% and 1.3% in 1Q20 to 4Q20, respectively.
The strength of the Taiwan dollar should come from capital inflows from the investment scheme as well as the Taiwan stock market, which remains resilient compared with other Asian markets. USD/TWD is expected to hold steady near 30.50 by the end of 2019, and the TWD should strengthen to 30.30, 30.00, 29.70 and 30.00 in 1Q20 to 4Q20, respectively.
Download
Download article"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.
This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.
The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.
Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.
ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).