Taiwan's industrial production data point to weak GDP growth

June industrial production came in lower than expected at -2.4% YoY.

DBS Group Research noted:

June industrial production came in lower than expected at -2.4% YoY or -2.0% MoM sa. The sluggishness in external demand definitely was the main drag. Adding to this was the slowdown in domestic consumption, due to weaker sentiment and higher inflation as a result of the unexpected tightening of fiscal policy in 2Q.

The poor results in June industrial production suggests that the 2Q GDP (due next Tuesday) will stay low at 0.4% YoY. Two major think tanks have recently cut their growth forecast for 2012 to 1.94% and 2.36% respectively. Chances are high that the government will also revise down its growth estimate when announcing the 2Q GDP next week, from the current 3.03% to less than 2.5%.

Going forward, a swift recovery in economic growth seems unlikely. Among the leading indicators, export orders registered a modest rise of 1.4% MoM sa in June. On the three month moving average basis, however, the sequential growth in export orders stayed at zero.

Chinese demand hasn’t showed a significant recovery (0.8% MoM sa). Orders from the US started to decline (-3.0%). And the technical rebound in European demand (5.0%), the main support to export orders in June, will not be sustainable. China, US and Europe account for two thirds of Taiwan’s final export demand. These three economies are slowing synchronously.

Fortunately, the negative repercussions on the labor market as a result of export slowdown have been limited so far. The unemployment rate stood at 4.24% sa in June, unchanged from 4.25% in May.

Unlike 2008 when output collapsed suddenly and deeply and unemployment surged, the growth slowdown emerged since 2H11 is gradual and moderate, and firms tend to use flexible working hours and unpaid leaves to cope with excess capacity. As such, on the relative basis, consumption is expected to remain as a stable component in the GDP.