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Macroeconomic Outlook of Taiwan

November 12th 2018

The Taiwan Institute of Economic Research (TIER) hosts its annual signature event, “Macroeconomic Outlook and Business Prospect” seminar on November 12th 2018. Dr. Chien-Fu Lin, President of TIER, and his research team study the current state and trends of global and domestic economies in 2019, identify potential challenges ahead, and strive to explore feasible solutions for the public and private sectors. Further emphasis is also placed upon Taiwan's future opportunities of industrial development in small and medium enterprises (SME), applications of artificial intelligence (AI) on consumption services, and utilization of block chain to help resolve issues of SME financing.

Taiwan's economy performed rather good in the first half of 2018 with above 3% GDP growth on average thanks to the increasing global demand. In addition to continuous double-digit growth in exports, Taiwan's stock market was also doing great with the Taiwan Stock Exchange remaining above 10,000 points. However, investment was frail during the first two quarters of this year. The trade conflicts between the US and China started to escalate since the third quarter this year. Furthermore, the US Federal Reserve's tightening measures caused the capital to flow out of emerging markets and move back to the US triggering rather stronger greenback.

The fluctuation in financial markets of developing economies in addition to growing uncertainties regarding the trade conflicts could cause negative impacts on world major markets including the US, Europe, and Japan as well as Taiwan's financial market. How can Taiwan sustain its much-needed economic recovery? What possible factors may hinder Taiwan's growth potential next year with respect to unwanted fiascos in the global economic and political arena? Questions like these are very important and deserve our greater attention.

As for the outlook of Taiwan's economy in 2019, we forecast that the investment will have a fair chance to rebound. Nevertheless, external demand can be hampered if the trade war becomes even worse and severe. Most international forecasting agencies believe that the growth in trade next year will never be as strong as 2018, because the trade war is unlikely to be settled soon. In the long run, such conflicts will not only slowdown trading activities but also deter investment and relevant manufacturing. Moreover, the crude price is questionable to stay as high next year due to weakening economic support. As a result, Taiwan's export in 2019 can hardly be as strong and promising as it would be in 2018.

Additionally, monetary tightening conducted by world major central banks can be sooner than expected. Strong US dollar and higher cost in foreign debt will continue to damage financial sectors of emerging economies. Chain reaction could drag down Taiwan's stock market performance along with private consumption; Taiwan's economic growth in 2019 will be slightly lower than its growth in 2018. TIER forecasts the GDP growth rate of Taiwan in 2019 standing at 2.20% or 0.37 percentage points lower than the previous forecast.

As for private consumption, Taiwan's personal income from 1st January till 31st August 2018 had been the highest growing period since the year of 2015 due to strong global economic recovery and increased domestic corporate profits in addition to record low unemployment which would be able to positively support the engine of consumption. However, the domestic consumers' confidence and relevant purchasing power will be negatively impacted because of recent fluctuations of global financial markets, declining Taiwan Stock Exchange, higher pricing for necessity goods plus fiscal reform. For that reason, TIER predicts the private consumption of Taiwan to grow by 2.20% for 2019 that will be 0.06 percentage points lower that the growth of 2018.

Regarding fixed capital formation, the imports in capital equipment of the 3rd quarter 2018 had a strong double-digit growth reflecting the fact that Taiwan's semiconductor companies have continued to expand their advanced production capacities. The ongoing trade conflicts between the US and China may incentivize outbound Taiwanese investors investing and operating in China to consider move their manufacturing back home; however, it is still uncertain because the investment environment needs to be improved. On the other hand, the government is planning to expand public construction as well as investment of state own enterprises; therefore, the overall fixed capital formation for the year of 2019 will certainly have higher growth compared with it in 2018. TIER forecasts the relevant growth rate standing at 4.40% with private investment growing by 3.12%.

About the trade issue, the trade war between the US and China is more likely to go on with the outcome of midterm elections giving the Trump administration little incentive to soften its hawkish trade strategy. As a result, the conflicts might cause serious impacts on the Asian supply value chains, whereas most forecasting agencies revised their forecasts for 2019 economic and trade growth ratios downward. As Taiwan has been deeply integrated with the regional supply chains, it is almost impossible for Taiwan to retain its performance in trade for 2019 as solid as that in 2018. TIER predicts that Taiwan's exports and imports will increase by 3.55% and 3.98% respectively.

Despite the basic salary increase will start in 2019, international commodity prices seem unlikely to rise and the effect of tobacco taxation is expected to subside; therefore, the inflation pressure for next year is mild. TIER forecasts that the consumer price index of next year will only increase by 1.40%. The US Fed already increased the federal funds rate 3 times this year. It is expected for the Fed to have one more rate hike by the end of this year and 3 more next year. However, it is also believed that Taiwan's economy will slowdown a little bit and face more headwinds such as the US-China trade war and potential risks in emerging markets, the CBC is deemed to conduct its dynamic and stable monetary policies in response to changing external environments.

In summering perspectives of international agencies, some believe that the global economy in 2019 will be as steady as it in 2018, but some trust that 2019 will never be able to outperform 2018. The Taiwan's economy is highly correlated with the world economy especially the US and China, which have been Taiwan's most important export destinations. If these two markets slowdown at the same time, Taiwan will be obliged to face harsh challenges. In case Taiwan's trade and consumption both are constrained by the trade conflicts and financial turmoil next year, capital formation especially government's fixed investment will serve as the main engine driving economic growth in 2019. It is hence very crucial for the government to initiate sound and feasible investment policies in response.

Taiwan- Data and Forecast

(NT$100 million, 2011=100), %