Taiwan: Growth hits one-year high in Q2 on firmer external demand and reshoring investment
July 31, 2019
The economy expanded 2.4% year-on-year in the second quarter according to an advance GDP estimate, up from Q1’s 1.7% and easily beating market analysts’ expectations of a 1.8% expansion. Meanwhile, on a seasonally-adjusted quarter-on-quarter basis, growth doubled from 0.6% in Q1 to 1.2% in Q2.
Looking at the details of domestic demand components, private consumption growth picked up from 1.3% year-on-year in Q1 to 1.6% in Q2, despite weakening consumer confidence and rising—but still mild—inflation in the quarter. Meanwhile, total investment (including inventories) slowed from Q1’s 6.9% growth but still logged a robust 6.0% reading in Q2, buttressed by government public investment in infrastructure. According to Iris Pang, greater China economist at ING, this was also in good part supported by Taiwanese manufacturers reshoring activities and investments from mainland China to the island, amid the persistent uncertainty caused by the U.S.-China trade war. Expanding upon this point, she noted that “there were 100 Taiwan enterprises returning to Taiwan [in the quarter], investing TWD500 billion in total”, and that this momentum may also have contributed to the upturn in private consumption growth. Lastly, government consumption spending continued to contract by 2.7% in Q2, but that still marked an improvement from Q1’s sharper contraction of 3.3%.
Turning to the external sector, both exports and imports of goods and services rebounded after logging feeble growth in Q1; however, exports outpaced imports, leading to a positive net growth contribution of the sector. Import growth picked up from 1.1% in Q1 to 3.7% in Q2, while export growth accelerated from 1.0% in Q1 to 4.1% in Q2. This led the external sector to contribute 0.7 points to the headline GDP print, up from a neutral contribution in Q1.
Looking ahead, a lower base effect from the end of last year should somewhat support growth in H2, while tentative signs indicate that tech sector demand might have bottomed out and could rebound in coming months. On the other hand, external headwinds loom large. The U.S.-China trade war has recently flared once again, with the U.S. preparing to apply new tariffs on USD 300 billion of Chinese goods—including tech products for which Taiwan is a key pillar of the supply chain—while a feud between Japan and South Korea is also rapidly escalating.
Author: Joffrey Simonet, Economist