Taiwan: Growth picks up to three-year high in Q2 on robust exports, but headwinds mount
July 31, 2018
A preliminary estimate shows that economic growth ticked up a notch in the second quarter on the back of resilient exports and slowing imports, supported by robust yet moderating domestic demand. GDP expanded 3.3% annually in Q2, its best performance since Q1 2015. The economy accelerated from Q1’s solid 3.0% expansion and surpassed market expectations of 2.9% growth. On a seasonally-adjusted quarter-on-quarter basis, GDP growth accelerated to 0.4% in Q2 from 0.3% in Q1.
All components of domestic demand lost some traction in the second quarter. Private consumption broadly maintained its momentum—growing 2.7% over the previous year (Q1: +2.7% year-on-year)—as consumer confidence remained high and upward wage pressure started to manifest, but nevertheless decelerated imperceptibly. While government spending was still largely expansionary, it decelerated from 6.6% year-on-year growth in Q1 to 5.9% growth. However, the biggest drag on growth came from fixed investment, which contracted for the fourth consecutive quarter, falling 2.4% yoy. This was a larger drop than in Q1 (-1.9% yoy), bucking the trend of previous quarters where the decrease in investment tended to soften over time. The contraction was largely driven by lower equipment and machinery purchases, reinforced by the mounting uncertainties surrounding global trade, on which Taiwan is extremely dependent.
Meanwhile, the external sector fared better than in Q1 mainly thanks to a moderation of imports, which grew 4.4% in Q2 (Q1: +6.1% yoy). Export growth moderated from Q1’s 6.7% expansion to 6.0% in Q2, likely because of softness in demand for smartphone components from China and a slowdown in the tech cycle. It might however—paradoxically—have also been supported by the escalation of trade barriers between the U.S. and China, with new tariffs having taken effect on 6 July. These tariffs may have prompted manufacturers to front-load production and shipping ahead of deadlines, thus inflating exports in Q2. Overall, the external sector contributed 1.5 percentage points to GDP growth (Q1: +1.0 point).
Although the economy benefits from a strong growth momentum, it is likely to lose steam somewhat in H2 as global headwinds rapidly mount. According to Nomura analysts, “The escalation of the US-China trade tensions could start to affect negatively Taiwan’s manufacturing activity […] as we view Taiwan as the most vulnerable to a supply-chain disruption in China”. Finally, the latest trade data indicates turbulence in the export-oriented sector is already showing, with export orders surprisingly falling in June, which Nomura analysts see as a sign that “weaker electronic parts demand could continue to weigh on production activity in Q3”.
Author: Joffrey Simonet, Economist