Why Taiwan couldn't be happy yet with better-than-expected GDP in 2Q

Here are 2 culprits.

According to Bank of America Merrill Lynch, Taiwan's 2Q13 final GDP reading came in better than the preliminary estimate announced on July 31. It was revised up to 2.49% (or +2.34% quarter-on-quarter, seasonally adjusted annualized rate) from 2.27% yoy (or +2.39% qoq saar), because of higher net export contribution (+2.1 percentage points vs. preliminary +2.0pp), better private consumption (1.7% vs. preliminary 1.6%) and smaller contraction in fixed investment (-2.8% vs. -3.0%).

Here's more:

Despite higher 2Q13 GDP, we are lowering our GDP growth forecast to 2.4% (from 2.7%) in 2013 and leaving our GDP growth unchanged at 3.1% in 2014. The downgrade is largely coming from 1) weaker investment demand and 2) still challenging export climate.

On 1), although we expect a modest recovery in fixed investment in 2H13 (see next page for more details), we revise down annual investment growth forecast to 3.5% yoy (from 5.6% yoy) given the downward revision for 1Q and the decline in 2Q, which was partly caused by the destocking process of the Taiwanese companies. The continuing sluggish global demand may also take a toll on Taiwan's export-driven investment, in our view.

As for 2), US growth optimism, robust ASEAN demand and a potential Eurozone bottoming should bolster Taiwan exports for the rest of this year and be able to offset the downside risks posed by China's slowdown in the near term.

However, the weaker-than-expected July exports, the surprise drop in Taiwan's June export orders and the fifth consecutive month of decline in industrial production suggest that high levels of uncertainty remain for the economy.

We believe the volatile data illustrates that the external demand recovery is still not solid.

In addition, the 3rd consecutive below-50 PMI reading suggests that Taiwan remains in 'contractionary' mode and the economy will struggle to enjoy a significant pick up in 2H13.

Meanwhile, we still see risks coming from domestic demand weaknesses, as imports of capital goods moderated due to uncertainty about the business outlook while consumer goods will likely be subdued by falling real wages.