Taiwan's GDP growth to fall below official expectations

DBS says export orders data will show that overseas demand has continued to contract for the fifth month in a row.

Here’s more from DBS Group Research:

Taiwan’s central bank (CBC) is expected to keep the benchmark discount rate unchanged at 1.875% at the quarterly meeting this Thursday. Admittedly, growth is slowing because of a deteriorating global environment. This week’s release of export orders data (May, Wed) will show that overseas demand has continued to contract in YoY terms for the fifth month in a row (excluding the Lunar New Year).

We forecast -3.4% YoY, a similar rate of decline compared to -3.5% in April. The month-on-month growth in export orders may have also slipped in May, although not dramatically, in line with the synchronized slowdown in global PMI. We expect GDP growth to stay positive but subpar in 2Q-3Q, concluding the full year at 2.0%, well below the official expectations of 3.0%.

Despite the worse-than-expected growth performance, the CBC has limited flexibility to cut rates to boost domestic growth. Inflation remains sticky at the current point and inflation expectations have been elevated due to the government’s hikes in fuel and electricity prices implemented since April.

Headline CPI posted 1.7% YoY in the latest month of May, well above the long-term average of 1.0%. With the overnight interbank rate, three month CP rate and one year time deposit rate standing at 0.5%, 0.8% and 1.36% respectively, the inflation-adjusted short term real rates have been broadly negative.

Balancing the risks of growth slowdown and inflation, the best option is for the CBC to keep policy unchanged at the current juncture.

In addition, thanks to the victory of the pro-bailout parties in Greek elections held yesterday, global financial markets are likely to breathe a sigh of relief this week. The pressures of foreign capital outflows, stock market sell-off and TWD depreciation should ease for now, which in turn, provides some comfort to the CBC to stay on hold.