8/2/2019 TWN_201110

1/8

1

The Economic Outlook of Taiwan

byRay Yeutien Chou

The Institute of Economics, Academia Sinica,

Taipei

October 2011

Prepared for Project LINK 2011 Fall Meeting,

New York City, Oct. 24-26, 2011

8/2/2019 TWN_201110

2/8

2

I. IntroductionTaiwans economy in the first half of 2011 expanded steadily, thanks to the

continued momentum of last years strong growth in domestic and foreign demand.

These include strong growth of domestic consumption and investment, rapid growthof emerging economies in Asia-Pacific, expanded cross-strait trade, and order transfer

effect resulted from Japans earthquake. The growth of economy reached 6.16%

year-on-year in the first quarter and 5.12% during the second quarter.

However, new developments in the international arena have created headwinds

to further growth in foreign demand for Taiwan exports: e.g., the unsettled and

worsening European debt crisis, weak US job market, earthquake impact on March 11

in Japan, Mainland Chinas tightening economic policy against inflation. Being an

economy heavily dependent on export, Taiwans economic prospect for the second

half of 2011 is deemed to be weaker. We have adjusted the 2011 real GDP growth

rate from the estimated 5.52% in July to 4.7%. The current uncertainty in international

economy is expected to be resolved at least partially, and the annual growth rate for

GDP is expected to reach a mild 5.12% in 2012.

II. Recent Economic Performance

A. Consumption

With the recovery of the world economy, Taiwans economy showed a strongperformance in 2010 which GDP growth rates reached 10.88%. Meanwhile, Taiwans

economy has continued to revive through the resilient domestic demand led by China

and other emerging countries, the economy's exports and private investment rose

significantly in the first quarter of 2011.

In terms of private consumption, moderate growth of the economy helped restore

consumer confidence and the improvement of the labor market facilitated consumer

spending. The private consumption experienced growth rates of 4.38% and 3.12% in

the first and second quarters of 2011. Consequently, the growth rate of nominal

private consumption in the first and second quarters of 2011 was 4.87% and 4.21%.

B. Investment

Total gross fixed capital formation grew substantially last year especially for

private investment. According to the Directorate-General of Budget, Accounting and

Statistics (DGBAS), total gross fixed capital formation and private investment had

enjoyed the double-digit growth, the growth rate was 23.44% and 32.51%,

respectively. Besides, domestic companies continued to expand production capacity

during the first quarter of 2011, the growth rate was 11.4% but plunged to 5.66% in

8/2/2019 TWN_201110

3/8

3

the second quarter due to external uncertainties.

As for other investment components, public investment grew at annual rates of

-0.46% and 7.19% in the third and fourth quarters of 2010. Its annual growth rate then

fell to -12.01% in the first quarter of 2011 and is expected further to -17.8% in the

second quarter. Meanwhile, the growth of government investment has declined

gradually, the growth rate of government investment rose 0.1% and -6.09% in the first

and second quarter of 2011. Private investment has recently become the major

momentum to support Taiwanese economy consequently.

C. Exports and Imports

Strong economic impetus in Asian emerging economies supported regional trade,

further encouraged Taiwans exports. And the demand for high-tech products from

advanced economies helped boost Taiwans exports and imports. For example, thetotal volume of exports from January to August of 2011 was 208.04 billion US dollars,

which represents a 15.7% year-on-year increase. Similarly, the volume of imports

(192 billion US dollars) increased by 17.6%. The trade surplus is expected to increase

25.8 billion US dollars in 2011, representing a slightly improvement from 2010.

China (including Hong Kong) was still the major export market for Taiwan, its

share in the total volume of exports reached 40.5%. Exports to China rose at the

growth rate of 10.4% year-on-year. The second and third larger export destinations

were the US and Japan, which shares in the total volume of exports were 11.9% and5.9% from January to August of 2011. Exports to the US increased by 22.4%

year-on-year, but exports to Japan increased merely by 3.5% because of Japans

disaster.

Industrial products were still the major exporting goods, accounting for 98.9% of

total export volume from January to August of 2011. Their total export volume

increased by 15.6% compared with the same period in 2010. As for total volume of

imports, agricultural and industrial material accounts for the largest share (77.3%)

from January to August of 2011, with an increase by 19.4% year-on-year.

D. Money, Prices and Exchange Rates

Owing to increases in bank loans and investment, the money supply (broad

monetary aggregate) M2 in August of 2011 rose 6.16% from a year earlier.

Comparing with the first eight months of the year, M2 grew an average annual growth

rate at 6.01%. The interest rate was still low relative to normal level, providing

abundant liquidity in the market. Inflation, held at a modest 1.34 percent in August,

about the same as a month earlier, following a drop in Taipei home prices and slowing

orders from abroad for Taiwanese manufactured goods. The annual growth rate of

8/2/2019 TWN_201110

4/8

4

Taiwans Consumer Price Index in 2011 is expected to grow slightly from 0.96% in

2010 to 1.69%. Also, the annual growth rate of Wholesale Price Index in 2011 is

expected to drop from 5.46% in 2010 to 3.84%. Moreover, due to the weak recovery

of United States, the Taiwanese Dollar exchange rate have steadily appreciated against

the US Dollar for more than 12 months, from a level of 32.17 in July last year to 29.0

in August this year. The recent turmoil created by the European sovereign debt crisis,

however, has caused the NT$ to depreciate significantly.

III. Future Prospects: 2011-2013

A. Consumption

Recent economic data indicates the downside risks in the US and European

Union (EU) economies are worsening. And the economic uncertainties in the US and

EU would dampen the confidence for consumer and business sectors. Taiwans

economy is certain to be affected by global market turmoil. But, despite the

weakening global economic outlook, domestic demand in Taiwan remains resilient.

According to the DGBAS, real GDP is forecasted to grow 4.81% in 2011, and

domestic demand become more important as a contributor to GDP growth in the

second half of 2011. Owing to the improvement of the job market and relaxation of

tourism restrictions from China, private consumption is expected to grow 3.09% and

3.61% year-on-year in the third and fourth quarter of 2011. Its annual growth rate is

projected to slightly decrease from 3.65% in 2010 to 3.48% in 2011. The average

growth rate of private consumption from 2012 to 2013 will be 3.67% in real terms.

B. Investment

The economic crisis in the US and EU is expected to harm the demand for

consumer electronics. So the decision of Taiwanese business spending becomes

slower and more cautious amid a gloomy global economy. According to the DGBAS,

private investment is expected to decline 9.91% and 6.76% in the third and fourth

quarter of 2011, respectively. We forecast the annual growth rate of private investmentfor 2011 will plunge substantially from 32.51% in 2010 to 2.6%.

At the same time, government and public investment are expected to be negative

growth this year mainly due to the end of public construction, the annual growth rate

of government and public investment is projected to -1.72% and -12.75%. Overall, the

annual growth rate of gross fixed capital formation for 2011 is forecasted to hugely

drop from 23.44% in 2010 to 0.68%, and the average annual growth of gross fixed

capital formation from 2012 to 2013 will be around 4.21%.

C. Exports and Imports

8/2/2019 TWN_201110

5/8

5

Recent global economic turmoil is caused by worsening debt crisis in EU and

slowing growth momentum in the US. Meanwhile, the economic crisis in EU and the

US has negative effects on export-oriented economies like Taiwan. The latest

economic data showed Taiwans export orders revealed a moderation in demand from

major export markets. This is a warning sign for Taiwan because it exhibited that

worsening conditions in EU and the US have not only hit the nations local tech sector,

but would also have an influence on labor market in coming months. Nevertheless,

the implementation of the Economic Cooperation Framework Agreement with China

has established closer economic and trade links with Taiwan. And strong economic

momentum in Asian emerging economies would support regional trade continuously,

further pushing Taiwans exports.

The 2011 annual growth rate of exports is projected to decelerate from 25.65% in

2010 to 5.96%. For 2012 and 2013, Taiwans exports of goods and services areanticipated to keep growing mildly. Moreover, the demand for electronic and

production machinery products, boosted by the industrial upgrading in China, may

further enhance Taiwans exports in the future. The average annual growth rate of

exports from 2012 to 2013 is expected to be 9.86%. In addition, the 2011 annual

growth rate of imports is forecasted to fall from 28.2% in 2010 to 1.86%. The average

annual growth rate of the import volume is expected to be 8.73% from 2012 to 2013.

D. Prices and Money SupplyIn terms of price, as governments around the world are beginning to adopt

austerity policies, the soaring international crude oil and raw material prices trend has

eased; therefore, the expected inflation remains within reasonable limits. Looking

ahead, the inflationary pressure of consumer price in Taiwan is expected to remain

under control at a moderate level. CPI will increase mildly at the rate of 1.45% and

2.00% for 2012 and 2013. Moreover, with global hot money flowed around, the prices

of agricultural and industrial raw materials have experienced great volatility. But the

inflation pressure will not become serious until global economy returns to solid

growth. WPI is projected to rise by 2.93% in 2012. As for exchange rate, with the

recoverable uncertainty of industrialized countries, NT dollar is expected to fluctuate

persistently. Thus, NT dollar would depreciate modestly from 29.4 per US Dollar in

2012 to 29.82 per US Dollar in 2013.

IV. Policy Issues and Uncertainty

Taiwans government signed a Cross-Straits Economic Cooperation Framework

Agreement (ECFA) with China in June 2010 and the policy took effect in September.More than 500 Taiwanese products exported to China enjoy preferential tariffs

8/2/2019 TWN_201110

6/8

6

following the implementation of ECFA. This agreement not only benefits to Taiwan in

economic trades with China, but also helps Taiwan to sign free trade agreements with

other trade partners in the future. The ECFA serves to show Taiwans trade partners

that the political tension across the Taiwan Strait has been reduced. It should enhance

Taiwan to play a more important role in the global economy.

Following the signing of the ECFA with China, Taiwan has signed an investment

protection arrangement with Japan in September this year. Minister of Economic

Affairs Shih Yen-hsiang described the investment protection arrangement as a

comprehensive and forward-looking pact covering three crucial areas: investment

protection, furthering investment and the spirit of free trade. This new trade

arrangement with Japan is a major breakthrough in bilateral ties over the past three

decades. Taiwans government continues to push for Taiwans participation in

regional economic integration and hopes to negotiate economic agreements with its

other major trading partners in the future.

V. Conclusion

Taiwan's economy in 2011 is expected to retain steady growth mainly on the

back of substantial growth in exports and private consumption. However, the

economic weakness in Europe and the US has affected Taiwans exports in the second

half of the year. In order to ease the impact of the recent debt crisis facing Europe andthe US on Taiwans economy, the government attempts to speed up further expansion

of exports to Asia and emerging markets. The implementation of the ECFA and the

signing of the Taiwan-Japan investment protection arrangement are major

accomplishments in this direction. On balance, we expect the annual growth rate of

real GDP of Taiwan will be around 5.10% from 2011 to 2013.

8/2/2019 TWN_201110

7/8

7

8/2/2019 TWN_201110

8/8

8