Taiwan's Q2 GDP disappoints

The GDP for the second quarter came in lower than expected at -0.2% YoY, says DBS.

DBS Group Research noted:

The 2Q GDP came in lower than expected at -0.2% YoY or 3.2% QoQ saar. Exports and investment both remained sluggish due to the synchronized slowdown in the world’s major economies – Europe, China and the US.

Private consumption also slowed markedly, weaker than suggested by the monthly retail sales data. This was because of the rise in inflation eroding real household incomes and the declines in stock market prices depressing consumer confidence. The increase in tourist spending on the back of rising inflows of Chinese tourists is captured by services exports in the GDP, instead of consumption.

Regarding the whole year forecast, we cut the growth estimate for 2012 to 1.3% from 2.0%, the second downgrade so far this year (2.9% projected in January). Our forecast is consistently below the market consensus and the official estimates. The downgrade for 2012 reflects a slower than expected recovery in export demand.

Consensus is that exports will recover significantly from 3Q onwards, lifting GDP growth to a potential rate of 4%. But there are now increasing risks that recovery will be delayed – Taiwan’s export orders remained flattish as of June, China’s flash PMI for July was lower than 50 and PMI in Korea dropped further in July.

Admittedly, the Taiwanese economy can make a resilient rebound if the global economic cycle finally turns up. Therefore we maintain the growth forecast for 2013 unchanged at 4.2%. Until the global cycle turns around, we don’t expect a domestic led recovery on the back of effective policy stimulus.

Interest rates are already rather low, both in nominal and real terms. It is a close call whether the central bank (CBC) will cut the benchmark rates at the next MPC meeting in September. The bottom line is that the CBC will refrain from aggressive easing.

CPI inflation will remain elevated in the upcoming months due to the rises in energy and food prices. Property prices inflation fueled by excess liquidity is also a concern for policymakers. To spur domestic demand, fiscal weapons are relatively powerful, in our view.

The government discussed stimulus measures in the past 1-2 weeks, proposed to offer export tax rebate and accelerate the implementation of public construction. The government is not considering a supplementary budget for 2012, however.

The compilation of the 2013 annual budget is currently underway. It remains to be seen whether the government will boost spending for next year and postpone the medium term target of fiscal consolidation.

The primary fiscal balance is expected to remain in a deficit position this year, and the public debt to GDP ratio should still be on the rise (42% in 2012, up from 40% in 2011). Given that the legal debt limit is capped at 48%, the government would be reluctant to use aggressive fiscal policies.