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Macroeconomic Outlook of Taiwan

November 11th 2019

The Taiwan Institute of Economic Research (TIER) hosts its annual signature event, “Macroeconomic Outlook and Business Prospect” seminar on November 11th 2019. Dr. Chien-Yi Chang, President of TIER, and his research team examine and analyze the current state and trends of global and domestic economies in 2020; identify opportunities and challenges of Taiwan's manufacturing, services and construction industries; and further explore how to connect early capital flows as well as applications of artificial intelligence (AI) on diverse sectors.

The trade conflicts between the US and China has escalated since the second half of 2018, and relevant impacts have weakened the global demand and slowed down export growths of many countries including Taiwan. However, there have been pros and cons for the economy of Taiwan, as shifting in export orders has actually helped pick up Taiwan's exports of communication and audiovisual products with double-digit growth on year-on-year basis for the first 3 quarters in 2019. In addition, the factory relocation effect has also helped enhance Taiwan's private investment growth rate, making the overall GDP growth increase consecutively since the first quarter of 2019.

It is believed for now that the US and China may reach a preliminary trade deal in the near future that will somewhat ease the tension and restore the market confidence. In addition, the US Federal Reserve as well as central banks of major countries have all conducted looser monetary operations with respect to their governments' expansionary fiscal policies. Given a relatively low base effect, almost all international major forecasting agencies trust that the global growth in 2020 will be higher than the growth in 2019. Besides the global recovery, Taiwanese businesses relocating their operations back home, high-tech industries speeding up in 5G infrastructure development, semiconductors investing in advanced manufacturing processes, and stabling commodity prices have altogether helped fuel Taiwan's export and investment engines. Furthermore, homecoming business manufacturing and operations will improve Taiwan's overall employment conditions and further boost the consumption engine subsequently.

For the reasons above, the TIER issues its last forecast in November that the GDP growth of Taiwan will be standing at 2.40% and 2.45% for 2019 and 2020 correspondingly, whereas the growth rate of 2020 is expected to be higher than the rate of 2019 by 0.05 percentage points.

As for private consumption, TIER predicts the growth rate will reach 2.03% for the year of 2020 due to policies in raising basic wage levels, job market improvement by factory relocations, and continued strong performance of Taiwan Stock Exchange. Regarding fixed capital formation and private investment, TIER forecasts the growth rates will stand at 4.20% and 3.86% respectively despite of high base effect and external and internal uncertainties. The reason of said forecast is because of certain public construction projects are designed and scheduled to be implemented next year.

As for trade, all major forecasting agencies believe that the growth in trade of 2020 will definitely be stronger than that of 2019, and the effect of homecoming Taiwanese businesses relocating their factories will certainly go on and pick up the export momentum. In addition, the fasting growing trends of high-speed calculation, internet of things, smart phones, 5G infrastructure, and highly correlated global and domestic semiconductors will all help enhance Taiwan's performance in external demand markets. According to the TIER forecast, Taiwan's exports and imports of goods and services in 2020 will grow by 3.30% and 3.45% separately.

Regarding monetary policies and relevant prices, TIER expects the CBC to maintain its dynamically stable monetary operations in 2020, as the crude oil prices may stop hiking soon, and the adjustment of basic wage levels shall impose limited impacts on the inflation. The growth rate of consumer price index in 2020 is predicted to increase as mild as 1.10% on average by TIER.
As for uncertainties, the future and unknown episode of US and China trade war is considered as the biggest uncertainty hindering the potential recovery of global and Taiwan's economies via the channels of trade, investment, and even equity markets. According to a survey conducted by TIER in September 2019, many Taiwan's manufacturers such as textiles, petrochemicals, steel industries all believed the trade war would cause negative impacts on their profits.

Next to the trade war, debt crisis is contemplated as the second largest uncertainty, because many countries are planning or adopting expansionary fiscal stimulus measures. As a result, debt crisis can be heightened, so the priority for those governments is trying to maintain fiscal disciplines. Furthermore, geopolitical turmoil is also an uncertainty that simply cannot be ignored. For example, the possible chaos in the middle east will surely cause severe impacts on commodity prices. Finally, whether or not the factory relocation effect due to trade war will be sustained or even expanded is inexact to certain extent.

Nevertheless, ICT industries moving their factories back to Taiwan is advantageous for domestic investment and direct exports. That will also help promote traditional manufacturing, financial industries, and real estates. Real wage level and internal demand can be further boosted consequently. If such effect can last and increase, it will be beneficial for Taiwan's economic development in not only 2020 but also numerous years ahead.

Taiwan- Data and Forecast

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