Disappointing 1Q GDP growth for Taiwan looms

Based on monthly data, the growth figure is predicted to register at 3% or below the potential rate of 4%.

Poor demand from China has been tagged as the the main cause for the underperformance. Orders from China fell sharply in 1H11, rebounded modestly in 4Q11, and moved sideways in 1Q12. Competitiveness with other Asia-Pacific nations may be an issue above and beyond cyclical weakness.

DBS Group Research noted:

Monthly data from Taiwan in 1Q have disappointed. Exports and industrial production have bottomed out but remaining far from the levels in 1H11 before the European debt crisis intensified. In other Asian NIEs like Korea and Singapore, exports and production have already recovered from the European crisis to a large extent.

Taiwan’s 1Q GDP growth due next week is expected to register 3%, up from the bottom of -0.6% in 4Q11, but lower than the potential rate of 4%. The annual GDP growth forecast for Taiwan in 2012 is far below the official projection of 3.85%, at 2.9%.

Taiwan’s growth has underperformed for an entire year and is mainly due to the weakness of exports to China.

Demand from the US has maintained a steady uptrend over the past year. Demand from Europe fell in 3Q11 during the European debt crisis, and have since recouped about half their losses. Note that Taiwan’s trade exposure to Europe is not exceptionally high compared to its Asian peers. The deterioration in the European economy accompanying the debt crisis shouldn’t hit Taiwan much harder than others.

The main drag on Taiwan’s exports was the poor demand from China. Orders from China fell sharply in 1H11, rebounded modestly in 4Q11 and moved sideways in 1Q12. The level of orders from China is now as much as 10% lower than its peak back in end-2010.

The weakness in Chinese demand significantly and negatively impacts the performance of Taiwan’s overall exports. China including Hong Kong accounts for 40% of the total exports in Taiwan, more than the 28% in Korea and 21% in Singapore. The share of China in Taiwan’s total export orders, a better measure for the sources of final demand, is also high, at 26%.

In particular, China occupies a dominant portion of 59% in the overseas demand on Taiwan’s precision & optical products, 44% on chemicals, and 38% on plastics & rubbers. Taiwanese exporters in these three sectors are highly dependent on the Chinese market.

To be sure, the weakness of exports to China over the past year was related to the macro policy tightening on the mainland and the resultant slowdown in the Chinese economy. However, this may be a competitiveness issue, rather than simply a cyclical phenomenon.

As far as the precision & optical products are concerned, Taiwanese LCD/LED flat panel producers have been facing intensive competitions from the Korean counterparts, given the advanced technology, complete supply chains and a more competitive exchange rate possessed by the latter.

In the non-tech sector like plastics & rubbers, competition from ASEAN exporters has increased in recent years. The ASEAN-China free trade agreement introduced tariff exemptions in 2010. By contrast, the tariff rates under the early harvest program of the Taiwan-China ECFA have been progressively lowered starting only from 2011, and will approach zero only from next year.

The near term growth outlook in Taiwan seems conservative. A reacceleration in the Chinese economy in the next several quarters this year may boost exports but not as much as it did in the previous cycles. The tariff disadvantage facingTaiwanese exporters against the ASEAN counterparts in the Chinese market will remain a problem this year. Improving the core competitiveness in Taiwan’s high tech sector may require longer-term efforts through  technology advancement.

Meanwhile, oil prices will be a drag on Taiwan’s domestic growth. The economy’s vulnerability to oil price shocks is among the highest in the region, as measured by the ratio of net oil imports to GDP. During the oil price runup in 1Q12, domestic consumption, as proxied by retail sales, deteriorated significantly. While crude prices have retreated, the government has cut fuel and electricity subsidies by raising the gasoline prices, normalizing the retail fuel pricing mechanism and by hiking the residential electricity prices. The impact is likely to be seen in 2Q.