Taiwanese Real GDP Growth Strengthened in Q2 14

• Real GDP in Taiwan grew at a stronger-than-expected pace in the second quarter, and growth should firm further in coming quarters due, at least in part, to acceleration in global economic activity.

Broad-Based Strength Lifts Taiwanese Growth in Q2

Recently released data show that real GDP in Taiwan rose 3.8 percent on a year-ago basis in Q2-2014 (top chart). Not only did the outturn come in above the consensus forecast, but it was the strongest year-over-year growth rate that the economy has posted in six quarters. Although growth in personal consumption expenditures ticked down to 2.6 percent in Q2 from 2.7 percent during the preceding quarter, acceleration in other spending categories helped to push the overall GDP growth rate higher.

The biggest swing was in the category of gross capital formation which, after receding 0.5 percent in the first quarter, rose 6.9 percent in the second quarter. Growth in government spending also moved from negative territory (-0.7 percent in Q1-2014) to positive territory (1.2 percent in Q2). In addition, Taiwan is very much a trading nation—real exports are equivalent to nearly 75 percent of GDP and the comparable ratio for real imports is more than 50 percent—so fluctuations in trade flows can have outsized effects on real GDP growth. In that regard, the pick-up in export growth to 4.5 percent in Q2 from 3.9 percent in Q1, added positively to real GDP growth. That said, the positive contribution from net exports to the overall rate of real GDP growth weakened in the second quarter as growth in real imports strengthened from 1.9 percent in Q1 to 3.9 percent in Q2. (Imports subtract from GDP, so a strengthening in import growth weighs on overall GDP growth, everything else equal.)

Most forecasters look for the rate of economic growth in Taiwan to trend modestly higher in the coming year. Indeed, the consensus forecast looks for Taiwanese GDP growth to strengthen from 2.1 percent in 2013 to 3.4 percent this year to 3.6 percent next year. If, as we expect, overall global growth strengthens in coming quarters, then the acceleration in Taiwanese output that the consensus forecast anticipates seems reasonable to us. In addition, the current level of interest rates in Taiwan will do little to slow economic growth in that country.

The Central Bank of the Republic of China has maintained its main policy rate at only 1.88 percent for more than three years due to the lack of inflationary pressures in the economy (middle chart). Although most forecasters look for the central bank to hike rates by the end of the year, they also suspect that the pace of tightening likely will remain restrained. After trending lower for roughly a year the Taiwanese dollar has recouped some lost ground versus the U.S. dollar over the past three months (bottom chart), and our currency strategy team looks for further modest appreciation of the Taiwanese currency against the greenback over the next year or so. Higher rates in Taiwan, the country’s large external surplus and buoyant international capital flows should all support the Taiwanese dollar in coming quarters.