Here's the biggest risk in Taiwan's economic outlook

2.6% GDP forecast has been penciled in.

The downside risks to the economy will mainly come from the export outlook, against the backdrop that the Chinese government is pushing for structural reforms and austerity programs and the European economy remains in recession.

On account of this, we forecast that Taiwan’s GDP growth will remain subpar at 2.6% in 2013 and 3.3% in 2014.

Here's more:

The second quarter GDP (preliminary estimate) will be announced this Wednesday. We expectreal GDP growth to improve modestly to 2.4% YoY
from 1.7% in the previous quarter.

Exports grew a steady 2.4% YoY in 2Q, while importsfell notably by -3.5%. The contribution of net exportsto GDP growth is expected to turn positive
afterfalling temporarily in 1Q.

In the domestic sector,retail sales rebounded to 0.4% YoY in Apr-Jun from -1.1% in Jan-Mar. Building permits granted for construction increased 33.7% in Apr-May.

This was because consumer confidence has picked up thanks to the easing of energy price inflation, hike of minimum wages and the government’srevision of capital gainstax on stock market trades. Meanwhile,the upturn in the housing market hasspurred construction investment.

We expect domestic demand to remain firm in 2H13. The favorable liquidity environmentthatsupports domestic asset marketshould remain unchanged in 2H13.

While a possible QE reduction by the US Fed could resultin a temporary period of portfolio capital outflows,the TWD and USD liquidity are expected
to remain ample thanks to the strong current account balance and a large stock of liquidity reserves held by domestic financial institutions.

A reduction of QE may also help to contain global commodity prices, which could potentially benefit Taiwan via reducing the costs ofraw material imports and lowering inflation.