Articles
23 July 2018

Taiwan: Revising currency and GDP forecasts on trade war worries

Taiwan's industrial production surprised on the downside on both a monthly and yearly basis. This could suggest that manufacturers are cautious about maintaining inventory during a possible trade war. We are revising GDP down to 2.4% in 2018 from a previous forecast of 2.6% and expect USD/TWD to depreciate to 31.00 from a previous forecast of 30.6

Manufacturing activity dims

Manufacturing activity slowed even before bilateral tariffs between Mainland China and the US were imposed on 6 July.

While Taiwan could win some orders from the substitution of Mainland products (for example, electrical machinery), manufacturers could be hit by a fall in global demand if the trade war intensifies.

We therefore revise our GDP growth forecast downward to 2.4% in 2018 from 2.6%, and USD/TWD to 31.00 from 30.6 (spot 30.64).

-3.5%

Taiwan industrial production MoM down from 8.2% MoM in May

0.36% YoY in June from 7.61% in May

Lower than expected

Taiwan's electronic-related production growth dims

Source: ING, Bloomberg
ING, Bloomberg

Manufacturers should be de-stocking

Manufacturing activity fell to 0.36% year-on-year from 7.61%, though the drop was partly a result of the high base effect last year. The monthly data also pointed to negative growth (-3.5% MoM) for all manufacturers except for tobacco, other transport equipment and those involved in the repair and installation of industrial machinery, who posted the strongest monthly growth. The data suggests that manufacturers have been cautious about building up inventories. They could be using inventories before increasing production.

Taiwan's central bank can do little but TWD can weaken further

Taiwan's central bank is in a difficult position if it's considering an interest rate cut, as the level of its current policy rate is 1.375%. If the economy faces a further downturn, there's little room for additional cuts. We believe the central bank will likely save its bullets for a more severe economic environment, which is why we expect it to stay put.

Still, this doesn't mean the Taiwan dollar can't weaken against the US dollar. Unless the USD were to weaken amid a tit-for-tat trade war, the TWD together with other Asian currencies would likely weaken further. So we revise USD/TWD to 31.00 at end 2018 (spot 30.64).

Taiwan central bank has little room to cut rate

Source: ING, Bloomberg
ING, Bloomberg

With little fiscal and monetary power, GDP growth will slow

As a small and open economy, Taiwan is subject to volatility in external demand. The bilateral trade war between Mainland China and the US is likely to lead to a fall in global demand. It is just a matter of time. And today's industrial production data sends a signal that the economy is fragile in the face of such a trade war.

We are therefore revising our GDP growth forecast for Taiwan to 2.4% in 2018 from our previous forecast of 2.6%.

Taiwan relies on exports to grow

Source: ING, Bloomberg
ING, Bloomberg

Disclaimer

"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).