Taiwanese GDP Grew At a Modest Pace in Q1-2015

Real GDP rose 3.5 percent on a year-ago basis in Q1, but growth was shored up by deceleration in imports. With few inflationary pressures at present, the central bank likely will remain on hold for some time.

Growth in Q1 Not As Solid As It First Appears

Recently released data showed that real GDP in Taiwan rose 3.5 percent on a year-ago basis in the first quarter (top chart). The outturn was more or less in line with the consensus forecast, and it represents a slight improvement over the 3.4 percent growth rate that was registered during the preceding period. The underlying details of the report were mixed, however.

The good news is that growth in real personal consumption expenditures edged up slightly to 2.5 percent in Q1 from 2.4 percent during the previous quarter. In addition, growth in real exports of goods and services also strengthened a bit in the first quarter. On the other hand, however, government expenditures fell 2.5 percent on a year-ago basis and growth in gross capital formation also slipped into negative territory. This weakness in overall domestic demand caused growth in imports to downshift from 4.9 percent in Q4 to 2.3 percent in Q1. Therefore, imports exerted less drag on the overall GDP growth rate in the first quarter than it did in Q4. Moreover, real GDP grew at an annualized rate of only 1.1 percent on a sequential basis in the first quarter, hardly a stellar outturn.

That said, real GDP growth has been firm enough to keep the unemployment rate on a downward trend (middle chart). And although the overall rate of CPI inflation has tumbled into negative territory in recent months, which largely reflects the collapse in oil prices, the core rate of inflation is running at about 1 percent at present (bottom chart).

The Central Bank of the Republic of China has kept its main policy rate unchanged at 1.88 percent for four years. Looking forward, most analysts believe that the central bank will remain on hold through the end of the year, which seems reasonable to us. There are few inflationary pressures in Taiwan at present, so why raise rates? Moreover, economic growth in mainland China, which is Taiwan’s largest trading partner, continues to slow. It is difficult to envision robust acceleration in Taiwanese economic activity if real GDP growth in mainland China continues to slow. In that regard, the consensus forecast looks for real GDP in Taiwan to grow 3.5 percent in 2015, which is identical to the growth rate that was registered last year.

TheTaiwanese dollar depreciated 7 percent against the U.S. dollar in the second half of last year when the greenback was enjoying broad-based strength. Although the Taiwanese dollar has subsequently recouped much of its earlier losses, our currency strategy team forecasts modest U.S. dollar strength vis-à-vis its Taiwanese counterpart later this year when we expect the Federal Reserve to begin raising rates.