Taiwan’s GDP growth slows to 3.4% YoY

According to the preliminary estimate, real GDP growth slowed to 3.4% YoY or -1.1% QoQ saar in 3Q, slightly weaker than our forecast of 3.7% YoY and -1.0% QoQ saar. The drags came mainly from exports, inventory and investment, because demand from Europe has fallen and manufacturers have aggressively cut production and capex on worries about European debt crisis and global recession.

The GDP breakdown details are reported in YoY terms. Based on our own transformation into the QoQ (saar) growth, we estimate that exports declined significantly by -8% in 3Q, and gross capital formation (fixed investment plus the volatile inventory component) plunged by over 30%. As the inventory destocking and investment decrease also reduced import demand, net exports still made a positive contribution to headline GDP growth in 3Q. On the other hand, private consumption – domestic final demand – has maintained a steady growth of 3%, aided by the continued improvement in employment conditions, buoyant property prices and solid credit growth.

Reflected in the GDP breakdown by industry, the export-dependent manufacturing sector slowed significantly in 3Q, while the services sectors which are driven by domestic consumption to a higher extent performed relatively well, such as wholesale & retail trade, finance & insurance and transport & storage.

While the QoQ growth contraction in 3Q may fuel market talk of a technical recession, this is not our central case forecast. We expect growth to rise rather than falling further on the sequential basis in 4Q, on the back of a sentiment recovery and inventory restocking in global manufacturing sector. The manufacturing PMI indices have started to improve in October in the major economies in the region including China and Japan. Nonetheless, there is lack of evidence to show that a strong
recovery in expor t s and industrial activity is underway

Meanwhile, domestic consumption demand is unlikely to accelerate further to drive GDP growth, as the property prices and credit growth are already at a peak zone, and the labor market which lags the business cycle is likely to see a pause in improvement. The official statistics agency yesterday cut its 2011 and 2012 GDP forecasts to 4.6% (from 4.8%) and 4.4% (from 4.6%) respectively. The official forecasts still stay on the optimistic side, which implies an on-trend growth in 4Q and above-trend growth in early-2012. We have been expecting relatively more conservative growth of 4.7% in 2011 and 4.3% in 2012, and the risks to our forecasts are on the downside.