Taiwan’s Economic Outlook – September 2016

iPhone to the Rescue – Again

The importance of the iPhone to Taiwan’s economy was demonstrated once again when in July it helped bring the first uptick in the country’s exports following 17 straight months of declines. Taiwan’s exports, a key driver of growth and domestic investment, posted 1.2% growth in July year-on-year, according to the Bureau of Foreign Trade (BOFT) under the Ministry of Economic Affairs (MOEA), despite slumping 7.7% year-to-date.

According to economist Ines Lam of analytics firm CLSA, who covers Hong Kong and Taiwan, the improvement can largely be attributed to demand brought on by the introduction of the latest iPhone model. “The iPhone effect [on the economy] usually can be seen around three months ahead of the product launch,” says Lam. “With the launch of the new iPhone scheduled for September, the impact can already be seen in strengthening electronics exports.” Taiwanese electronics and semiconductor manufacturers are the main components suppliers to Apple’s primary assembler, Hon Hai Precision Industries, a Taiwanese entity operating mostly in China.

September 2016 Taiwan Economic Indicators (YOY). Source: MOEA, DGBAS, CBC, BOFT

Exports to China recovered in July, rising 3.4% year-on-year, but contracted 9.4% year-to-date. To the United States, exports dropped by 7.3% in July and 7.6% year-to-date, but exports to the EU posted positive growth in July at 4.7% and year-to-date at 3.5%.

Taiwan’s Machinery and Electrical Equipment sector, which contributes 55% of Taiwan’s total exports, finally arrested months of declines to post a modest recovery by growing 3.1% from July of last year, although the sector still saw a 4% drop for the year to date.

Not everyone is enjoying better sales however. Foundry chipmaker Taiwan Semiconductor (TSMC), Taiwan’s largest exporter, saw sales down 5.6% from a year earlier, to US$2.45 billion, according to Reuters.

Lam expects slightly rising global demand for electronics as well as rebounding oil prices to enable Taiwan to achieve slim export growth of less than 3% in the second half of 2016.

Changes in taiwan trade value July 2016 - Source: TWSE
Source: TWSE

Rising oil prices are a net gain for Taiwan’s economy, says Lam, as they spur price hikes for several of Taiwan’s petroleum-related commodities exports, including chemicals and plastics. Steep falls in the price of crude oil had caused the value of those exports to plummet by double digits, having an oversized impact on Taiwan’s total export performance. In July, higher oil prices pushed petroleum-product exports up 15.1% and chemicals by 4.1%, while plastics grew by a mere 1.7%.

Taiwan’s Directorate-General of Budget, Accounting, and Statistics (DGBAS) reported that growth in the Industrial Production Index came to an anemic 0.31%. Export Orders, a leading indicator of future performance in exports, likewise declined in July, according to the MOEA, with Taiwan receiving total export orders of US$35.03 billion in July, a 3.4% decrease. Year-to-date export orders stood at US$236.11 billion, a 6.8% decline. Taiwan’s Purchasing Managers Index (PMI), also a leading indicator of manufacturing activity, remained in positive territory for a second month, at 51. Anything over 50 is considered expansionary.

Lam notes that business investment closely tracks exports and has similarly languished. Gross capital formation contracted by 3.10% year-on-year, according to the DGBAS. However, “manufacturers will invest only if they see greater exports, so recovery in exports should result in a reciprocal recovery in investment,” says Lam.

Unemployment ticked upwards to 4.02%, a slight increase over June’s 3.92%, but the consumer price index remained stable at 1.23%. Consumer confidence, as measured by the National Central University’s Research Centre for Taiwan Economic Development (RCTED), also saw an improvement, rising to 80.18 in July from 78.36 in June.