Taiwan GDP growth pegged at 0.4%

Exports remained sluggish in the second quarter, says DBS, amid the synchronized slowdown in Europe, US, and China.

DBS Group Research noted:

The preliminary estimate of the second quarter GDP is due tomorrow. Growth is expected to stay low at 0.4% YoY, a similar level as in 1Q. Exports remained sluggish in 2Q, amid the synchronized slowdown in Europe, US and China. Consumption growth should have also decelerated, due to worsening sentiment and rising inflation as a result of the unfavorable policy adjustments including fuel/electricity price hikes and capital gain taxes.

That said, we don’t expect GDP growth to slide much further in 2Q versus1Q. This is because the economy already deteriorated more than its counterparts during the global slowdown in 2H11, reflecting the rapid adjustments of inventory and capacity in the cyclically-sensitive manufacturing sector. Investment, which had fallen by more than 10% in the past four quarters, showed some signs of stabilization in 2Q12.

With growth averaging at only 0.4% in 1H12, the official estimate of 3% growth in the full year of 2012 will prove to be over-optimistic. Two major think tanks have recently lowered their growth forecast for 2012 to 1.9% and 2.4% respectively. The government will also cut its forecast to less than 2.5% tomorrow.

Consensus is that growth will return to the potential rate of 4% from 3Q onwards, based on the key assumption of an improvement in global environment. There are now increasing risks that, however, recovery will come later or weaker than currently expected. Leading indicators including export orders and consumer confidence remained at depressed levels as of June, casting shadows on the 3Q outlook.

Expectations are building up that macro policies will be shifted to easing mode to support domestic growth. But inflation remains relatively high and interest rates are already rather low. The inflation adjusted 1-year deposit rate is -0.4% at present. Rate cuts by the central bank, if any, would not be aggressive. Don’t expect a domestic led recovery on the back of monetary policy loosening.