Taiwan’s economy under pressure as trade woes continue

Weak global semiconductor demand, limited benefits from China’s reopening, and further rate hikes mean it’s a tough year ahead for Taiwan.

Taiwan: At a glance

Taiwan’s economy has shown signs of weakness since September 2022, when global semiconductor demand falls. That is mostly due to high inflation and therefore weaker demand for electronic goods in the US and Europe. Demand from China, which is also a large consumer market, has also suffered due to the Covid-19 measures. Average growth in the first three quarters averaged more than 3% annually. This is lower compared to 7% in the same period last year. Inflation increased but did not exceed 3.6% in 2022. The central bank still raised the discount rate to 1.75% from 1.125%. The Taiwan dollar weakened against the US dollar by nearly 10% in 2022.

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GDP and inflation outlook


Source: CEIC, ING estimate

3 calls for 2023

Weak semiconductor demand leading to slower growth

Taiwan’s economy will continue to suffer from declining sales of semiconductors as external demand slows. Semiconductors contribute nearly 40% of Taiwan’s exports. As high inflation continues to erode purchasing power in the US and Europe, and with the economy of Mainland China not yet fully recovering, challenging times for semiconductors and therefore trade for Taiwan may continue until the very minus the first half of 2023. If external demand improves in the second half of the year, Taiwan’s economic growth should accelerate.

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The reopening of borders with Mainland China may not benefit Taiwan

Mainland China’s lifting of most Covid restrictions and reopening of borders may not benefit Taiwan, at least in the first half of 2023. Taiwan has banned Mainland Chinese tourists since the outbreak of Covid, and only Chinese citizens are allowed to visit for business or family reasons. This means that retail sales in Taiwan may not recover to pre-Covid levels by 2023.

Fiscal policy weighs on the economy

Taiwan’s central bank may continue to overshadow the US Fed’s rate hike path, at least in the first quarter of 2023. That means monetary policy will exacerbate weak economic growth. This is a risky policy, which may bring more financial pressure on companies and households who will face higher interest costs. On the fiscal side, the government may need to extend preferential policies to small and medium-sized businesses and is likely to spend more on military expenditures. The New Taiwan dollar (TWD) will be volatile if the central bank changes its interest rate path from rising to cutting. Taking more time to move from hikes to easing than the US Fed would help support the TWD against the US dollar from the second quarter to the fourth quarter of 2023.

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Taiwan forecast summary table


Source: CEIC, ING estimate

Read the original analysis: Taiwan’s economy is under pressure as trade tensions continue


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