Taiwanese Q4 GDP Growth Falls Just Shy of Expectations

Real GDP growth in Taiwan grew at a 3.2 percent year-over-year rate, which was good enough for 3.5 percent growth for the full year 2014. Slower economic growth in China remains a primary concern.

Broad-Based Support for Economic Growth in 2014

Data released this morning showed that real GDP in Taiwan rose 3.2 percent on a year-ago basis in the fourth quarter (top chart). Over the course of 2014 real GDP grew 3.5 percent, the strongest annual average growth rate in three years. That said, the Taiwanese economy is a long way from churning out the 5 percent to 6 percent annual average growth rates that it registered in the middle part of the past decade.

A breakout into the underlying demand components of GDP show that every major component posted positive growth rates in 2014. Private consumption picked up slightly, growing 2.7 percent for the year, compared to 2.4 percent in 2013. Business fixed investment growth slowed, but still managed to post a solid growth rate of 4.7 percent. Government consumption rebounded, following a decline in 2013, growing 3.1 percent.

Taiwan’s economy is among the most open economies in the world, as exports are equivalent to nearly 75 percent of GDP. Net exports contributed 0.7 percentage points to GDP in 2014, a modest pickup from the previous year. Monthly trade data have been choppy, but have shown a gradual improvement in the volume of exports throughout 2014 (middle chart). About 40 percent of Taiwan’s exports are destined for mainland China, and the continued moderation of economic growth in China will prove to be a headwind on exports and overall economic growth in Taiwan. Indeed, Bloomberg consensus expectations look for the Taiwanese economy to grow at around 3.5 percent in both 2015 and 2016, with no material pickup in sight.

Low Inflation, Weaker Currency

Like most countries, CPI inflation is down, as the year-over-year rate of headline inflation fell to 0.6 percent in December. This is down from around 2 percent in the recent past, as the drop in oil prices has weighed on headline inflation rates across the globe. However, “core” CPI inflation has remained relatively resilient, at 1.3 percent year-over-year in December. With headline inflation heading towards zero, and core inflation well below two percent, there really are few signs of inflationary pressures in Taiwan at this time.

The Taiwanese dollar has depreciated over the past year, as have many foreign currencies against the U.S. dollar (bottom chart). The Central Bank of the Republic of China has kept rates on hold at 1.88 percent for the past four years, and we are not expecting a change to this policy any time soon. Despite a slight rebound more recently, our currency strategy team continues to look for further depreciation for the Taiwanese dollar. This comes as we expect the Fed to begin raising interest rates toward the middle of this year, putting further downward pressure on foreign currencies, especially in emerging market economies.