Taiwan: All eyes on domestic demand as exports weaken

The external tailwind for Taiwan’s economic growth is fading. Exports have decelerated to 3.1% YoY in Q3 2018, a big fall from 11.2% in the last quarter. In addition, imports are increasing as Taiwanese companies push for investment , especially in machinery. Therefore, the net trade components could turn negative for GDP growth. Fortunately, domestic demand is helping. Investment is benefiting from a favourable base effect as its performance in H2 2017 was the worst in recent years. The surge of machinery imports at 21% YoY, notably from the US and Japan, is a sign of stronger fixed asset investment. Inward foreign direct investment (as shown in a pproved FDI ) has increased 38% YoY YTD especially in the semiconductor industry . Beyond investment, consumption remains stable supported by higher government spending. As far as financial markets are concerned, Taiwan’s equity market is down 12 % to 9,516 from the end of June, in line with global developments driven by tech stocks. The Formosa bond market is frozen with issuance falling 79% YoY to 2,102 USD million in Q3 2018 as t he new regulation for foreign investment on Taiwanese lifers has raised uncertainties . F or properties , mortgages are growing on the back of renewed price increase in Taipei City. On monetary policy, CBC Deputy Gov ernor Yen Tzung -Ta mentioned that the impact of lax monetary policy on economy growth was limited under a low interest rate environment but we do not expect this to lead to a change in policy stance. With limited inflation ary pressure and huge uncertainty stemming from the US-China trade war, we expect the CBC to maintain the status quo. All in all, Taiwan’s economic growth has remained resilient thanks to domestic demand even exports are fading . We expect Taiwan to grow 3.0% in Q3 2018 on the basis of favourable base effect for investment and higher fiscal spending ahead of the upcoming local elections in November . Beyond trade , the downside risk comes from the impact that prolonged sluggish wage growth could have on private consumptio n in the future .