Taiwanese GDP Considerably Weaker Than Expected in Q2

The year-over-year rate of GDP growth came in at just 0.6 percent in the second quarter, which was well short of consensus expectations of more than 2.6 percent as export weakness weighs on growth.

Export Weakness Chief Concern

 Not only was the year-over-year rate of real GDP growth much weaker than expected, on a sequential basis, the Taiwanese economy actually contracted at an annualized rate of 7.7 percent. As Taiwan is one of the world’s most open economies—exports represent roughly 75 percent of GDP—its struggling export sector poses a key challenge for overall real GDP growth. Exports have fallen in five out of the past six months. While a complete breakdown of all the underlying components is not yet available, it appears that a moderating pace of growth in China—Taiwan’s top export market—is becoming an even greater headwind for exports. On a year-over-year basis, exports have fallen 1.3 percent. With economic activity in China set to decelerate further in the coming quarters, growth on the small island nation will likely remain stunted by weak exports for the foreseeable future. Moreover, CPI inflation is currently negative on a year-over-year basis, and the rate of core inflation remains low as well. Even as most other Asian central banks have either been cutting rates or (in the case of Japan) engaging in an aggressive quantitative easing campaign, Taiwan’s central bank has held its policy rate steady at 1.88 percent for roughly four years. The Taiwanese dollar is a rare example of a currency that has gained in value versus the U.S. dollar this year. A strong Taiwanese dollar is another impediment to exports as it makes Taiwanese goods more expensive to foreign buyers, all else equal. 

Resilience in the Domestic Economy 

Despite the headwinds to export growth and the weakness in the second quarter figures, recent economic indicators offer some hope for prospects in the domestic economy. The unemployment rate in Taiwan, for example, remains near the lowest reading for more than the past 14 years. While retail sales growth was weak in the first quarter, stores have been reporting increasing sales in each of the past three months. This strengthening in the domestic economy was evident in today’s report. Private final consumption actually strengthened to a year-over-year growth rate of 2.8 percent, up from 2.5 percent previously, and gross capital formation strengthened as well. Unfortunately, regardless of the potential resilience of the domestic economy, the importance of exports to Taiwan’s economy means that its destiny is linked to prospects in China and the rest of the global economy.