Taiwan: Economy contracts for third consecutive quarter in Q1 on exports slump
May 30, 2016
The export-driven economy of Taiwan remained in a deep recession in Q1 as demand for Taiwanese goods continued to be lackluster. In the first quarter of 2016, GDP contracted a softer 0.7% annually, marking the third consecutive quarterly contraction (initial estimate: -0.8% year-on-year). Q1’s reading was also worse than analysts’ expectations of a softer 0.6% contraction and came in above Q4’s revised 0.9% contraction (previously reported: -0.5% yoy). On a quarterly basis, the economy accelerated from 0.2% growth in Q4 (previously reported: +0.5% yoy) to 0.8% in Q1 (previously reported: +0.2% yoy). Despite aggressive fiscal stimulus, the government has been unable to compensate for a stark deterioration in the external sector.
Q1’s weak result came on the back of a poor performance in the external sector, which more than offset a moderate improvement in domestic demand. The contraction in exports worsened from a 2.4% fall in Q4 (previously reported: -2.6% yoy) to a sharper 4.1% decline in Q1 (previously reported: -3.9% yoy) over the same period last year, marking the worst result in over six years. Taiwanese exports have taken a big hit from the Chinese economic slowdown as well as from increased competition. The free-trade agreement between Korea and China, which went into effect at the end of last year, has put Taiwan at a serious disadvantage. Korean goods compete directly with Taiwanese goods and mainland China and Hong Kong together account for nearly 40% of Taiwanese exports (Hong Kong is an important port of entry into China for Taiwanese goods). Similarly, the contraction in imports sharpened from a 0.8% drop to a 1.1% decline (previously reported: Q1 -0.9% yoy; Q4: -1.0% yoy). As exports contracted at a sharper rate than imports, the contribution of the external sector to growth deteriorated notably from minus 1.3 percentage points in Q4 to minus 2.3 points in Q1.
On the domestic side of the economy, growth in private consumption accelerated in Q1 from a revised 1.7% in Q4 to a stronger 2.2% (previously reported: Q1: +1.8% yoy; Q4: +1.5% yoy). Private consumption benefitted from an environment of higher consumer subsidies, falling prices and a harsh winter that prompted consumers to buy winter gear. Government consumption jumped from a 0.3% expansion in Q4 (previously reported: -0.1% yoy) to a solid 5.1% expansion in the first quarter (previously reported: +5.5% yoy), which was the biggest expansion in over 14 years. The reading was supported by an expansionary fiscal policy coupled with the delayed impact of different public measures, such as investment in real estate and facilitating companies’ access to credit. Real gross capital formation swung from a 1.4% expansion in Q4 to a 0.5% drop in Q1 (previously reported: Q1 -2.5% yoy; Q4: 0.0% yoy) as capital and inventory investment dropped due to greater political uncertainty stemming from the election of pro-independence President Tsai Ing-wen.
Prospects of a swift economic recovery appear unlikely. China’s slowdown is expected to continue weighing on Taiwan’s economy and demand for Taiwanese goods remains low. Due to the recent change in the maximum limit for government deficits, a demand-led recovery is unlikely as President Tsai Ing-wen is adamant to not exceed the established fiscal deficit limit. Instead, she plans to support the economy by decreasing over-reliance on China and supporting new industries within the Island–two long-term processes. Regarding the new deficit limit laws and their impact of GDP growth, Young Sun Kwon, economist from Nomura, points out:
“The new government declared the annual growth rate of central government debt would not exceed the average GDP growth rate of the previous three years, which is viewed as stricter than current rules (central government debt outstanding cannot exceed 40.6% of average nominal GDP based on previous three years). Although we see room to increase fiscal spending, the new government seems to be focused more on structural reforms than short-term economic performance.”