Taiwan’s economy faces mounting risks from demand slowdown

TAIWAN'S economic momentum is under pressure this year as high inflation, geopolitical tensions and fading global demand for its exports threaten growth.

Gross domestic product (GDP) - which Taiwan will report on Friday (Oct 28) - is projected to have grown 3.2 per cent in the July-to-September period from a year ago, according to the median estimate in a Bloomberg survey of economists. That would be slightly better than the 3.05 per cent expansion recorded in the prior three months, but the numbers are backward looking and won't reflect the entirety of a downturn that began weighing on trade in September.

It's a far cry from the rapid pace of growth recorded last year when full-year GDP increased more than 6 per cent. Taiwanese officials have already warned that the trade outlook for the rest of the year is grim after overseas shipments dropped last month for the first since 2020.

Taiwan faces a number of global challenges, including high global inflation that is contributing to the slump in demand that's dented exports and weighed on manufacturing output. China's pursuit of Covid Zero has snarled trade with a critical economic partner, while Russia's war in Ukraine and rising geopolitical tensions between the US and China involving Taiwan have further muddled the picture.

The hit to the economy is "more complicated" than during the financial crisis in 2008, said Winston Chiao, an economist at Taipei-based Taishin Securities.

The decline in exports in September ended a two-year period of stellar trade performance. Officials cautioned then that overseas shipments may continue to struggle through the rest of this year as demand in China and the rest of the world is sluggish, and the slowdown has begun weighing on businesses in Taiwan, with industrial production unexpectedly dropping last month as demand for manufactured goods weakened.

US technology restrictions on China have added to risks for Taiwan, as the island's economy and trade is heavily reliant on exporting semiconductors. While Taiwan's economic affairs minister downplayed the impact of new chip curbs on the economy, the US announcement still rattled the global semiconductor industry, with shares in Taiwan Semiconductor Manufacturing (TSMC) falling dramatically.

While officials have stressed a need to diversify trade with other places, China and Hong Kong remain a top destination for Taiwan's exports.

Economists expect Taiwan's economic growth to reach 3.2 per cent this year before slowing to a 2.6 per cent expansion in 2023, which would be the worst performance since 2016. The economy could even be pulled into recession should tech exports stay weak and drag down domestic growth, Citigroup economist Adrienne Lui wrote in a report.

"External challenges will eventually spill over to the domestic economy" if the globe falls into recession, she wrote, noting that Taiwan is heavily dependent on small- and medium-sized enterprises, so wages and employment would be affected.

Taiwan's biggest firms are also under pressure from waning demand. TSMC said this month it's cutting capital spending, a decision that "could lead to similar cuts from a chain of other Taiwanese firms in the semiconductor supply chain", Chiao said. BLOOMBERG

READ MORE

BT is now on Telegram!

For daily updates on weekdays and specially selected content for the weekend. Subscribe to t.me/BizTimes