Taiwan's economy contracted by 0.8% y-o-y in Q116, marking the third straight quarterly decline and extending the country's technical recession. Despite the transitory pick up in the Chinese economy, continued political uncertainty and a host of other domestic factors suggest that growth is unlikely to pick up until H216. With Q116 data coming in weaker than expected, we have downgraded our 2016 real GDP forecast slightly to 1.2% (from 1.5% previously).
With Taiwanese president-elect Tsai Ing-wen having yet to fully articulate her China policy, Beijing has attempted to influence the formulation of Taiwan's cross-Strait policy by alternating between promises of economic growth and diplomatic threats. However, these measures are unlikely to yield significant results as Tsai focuses on establishing her government ahead of her installation on May 20. We therefore expect cross-Strait ties to remain somewhat strained over the coming months, and note that the CSSTA is unlikely to be ratified anytime soon.
In line with our expectations, the CBC cut its discount rate by 12.5bps to 1.50% during its monetary meeting on March 24. We maintain our forecast for one more interest rate cut in 2016, which will take the benchmark rate to 1.375% by end-2016 as continued export headwinds and low inflation prompt the CBC to cut rates in a bid to support growth and keep the Taiwan dollar competitive.
The lifting of housing restrictions by the central bank will be insufficient to boost the domestic housing market, which will continue to face headwinds following the aftermath of a deadly earthquake and the implementation of housing-related capital gains taxes. With housing-related taxes accounting for a not insignificant proportion of government revenue, we maintain our forecast for the government's 2016 fiscal deficit to come in at 1.6% of GDP as housing-related revenues fall short.
The TWD has rebounded considerably since the beginning of the year in line with the broad-based weakening of the US dollar. With the currency supported by strong fundamentals and the US dollar likely to continue to gradually weaken, we have upgraded our average 2016 forecast to TWD32.50/USD from TWD34.3.0/USD previously. Over the long-term, an undervalued real effective exchange rate and a large current account surplus will lend support to the TWD, leading to gradual strength.
Major Forecast Changes
With Q116 data coming in weaker than expected, we have downgraded our 2016 real GDP forecast slightly to 1.2% (from 1.5% previously).
With the currency supported by strong fundamentals and the US dollar likely to continue to gradually weaken, we have upgraded our average 2016 forecast to TWD32.50/USD from TWD34.3.0/USD previously.
Downside Risks To Growth Forecast: Should we see a re-emergence of a crisis in the eurozone, a slower than expected US recovery or a downward spiral in China's economy, we can expect Taiwan to head into a sharp recession.
|Nominal GDP, USDbn||530.8||525.8||520.9||559.7|
|Real GDP growth, % y-o-y||3.9||0.8||1.2||2.3|
|Consumer price inflation, % y-o-y, eop||0.6||-1.2||1.6||2.0|
|Exchange rate TWD/USD, eop||31.66||32.86||32.30||31.50|
|Budget balance, % of GDP||-0.9||-1.5||-1.6||-1.6|
|Current account balance, % of GDP||12.6||14.5||13.5||13.1|
Assess your risk exposure in Taiwan with our 100% independent forecasts assessing the pace and stability of this key market. Backed by trusted data from BMI Research's 52 million data point economic forecast model, this report will allow you to measure political, economic, business environment and operational risks in Taiwan with confidence.
Your subscription service includes:
- Delivery of the report in print and PDF
- Online access for 12 months
- The functionality to translate your online report into your choice of 10 languages - Arabic, Chinese, French, German, Italian, Japanese, Korean, Portuguese, Russian and Spanish
- The ability to export data and graphs from the online report directly into your workflow
- The support of a dedicated Account Manager to answer any questions you might have about your subscription
- Access to our team of leading analysts who will be happy to answer any questions you might have about the data and forecasts included in this report