Taiwan Economic Outlook and Cross-Strait Affairs – February 2018

Data Source: TWSE; Unit: NT$ Billion

POSITIVE END TO 2017

Taiwan and the world finished 2017 on a good note – with the expectation of more good news in 2018. The Taiwan economy ended the year by recording its strongest growth level in years, on the back of record-high exports. Momentum is likely to continue into 2019, with leading indicators all pointing upwards.

Taiwan’s trade-dependent economy was buoyed by stronger than expected growth in global trade. Exports continued their bull run through December, increasing 13.2% for 2017 in annual comparisons, for a total value of US$317.4 billion, according to data from the Bureau of Foreign Trade under the Ministry of Economic Affairs.

The global trade environment appears favorable. The International Monetary Fund raised its worldwide economic growth forecast for 2018 to 3.9%, even stronger than the 3.7% growth in 2017, on the expectation that global trade and investment will remain vigorous. Tax reform in the United States is expected to have a strong impact as well. The IMF sees global trade growing at 3.8% and 3.9% in 2017 and 2018, respectively, a far cry from annual averages of 6% pre-2008 crisis, but better than in recent years.

IMA Asia, an association of regional CEOs, sees the Trump tax cut benefiting Taiwan’s exports by spurring capex demand in the United States, which will likely raise demand for Taiwanese equipment and components. Taiwan is the tenth largest trade partner to the United States, and the United States is Taiwan’s second largest trade partner. Exports to the United States rose 10.3% in 2017 to reach US$36.978 billion. Imports from the United States also rose but at a slower pace, despite pressure from the Trump administration to reduce trade deficits. Total imports from the United States amounted to US$30.2 billion, a 5.6% increase, for a US$6.8 billion balance in Taiwan’s favor.

China, Taiwan’s leading trade partner, was expected to record some 6.4% economic growth in 2017, and that pace looks likely to continue unabated. Taiwan’s exports have benefited accordingly. Together with Hong Kong, China took 41% of Taiwan’s total exports last year – US$130.3 billion worth for a 16% increase in annual comparisons. The European Union (EU) emerged as a surprising engine of global trade in 2017, according to the IMF, and looks set to achieve growth of 2.3% in 2018. The EU’s return to growth is reflected in Taiwan’s trade with the continent, which rose 10.6% to US$27.18 billion in 2017. Taiwanese exports to ASEAN also surged in 2017, rising by 14.2% to US$58.6 billion, reflecting the Tsai administration’s New Southbound policy of promoting connections with Southeast Asia.

Taiwan’s vital machinery and electrical equipment sector once again led the way in exports. With an export value of US$178 billion, accounting for 56.1% of total exports, this sector surged 15.4% in 2017. Other leading export categories also saw strong growth last year, including metals (US$29 billion, an 18.4% rise) and plastics (up 15.4% to US$22.977 billion).

Leading economic indicators were also positive, with the Purchasing Managers Index (PMI) continuing its 22-month rise. Compiled by the Chung Hua Institution for Economic Research, the PMI reached 58 on a 100 point scale in December, up from 57.2 in November. Any number above 50 represents positive sentiment. Export orders also jumped in December, by 17.5% year-on-year to US$48.47 billion, beating expectations of a 13% increase. Export orders indicate the state of exports months in advance.

The accumulation of good news has spurred economists to revise GDP growth upwardly for 2017 and 2018. Taiwan’s official statistics bureau, the Directorate General of Budget, Accounting and Statistics (DGBAS), now estimates 2017 growth at 2.84%, projecting a slower 2.29% in 2018. Academia Sinica expects the final GDP growth rate for 2017 to come in at 2.64%, and forecasts 2018 growth of 2.43%. Economic think-tank Yuanta-Polaris Research Institute sees 2017 GDP growth at 2.62% and 2018 growth at 2.2%.

Consumer confidence as measured by National Central University’s Research Center for Taiwan Economic Development spiked in January, reaching 87.69, up from 86.05 in December, the highest reading since July 2015. The survey is based on a 200-point scale. Any number below 100 is theoretically considered pessimistic, yet the survey has never actually exceeded this mark.

 

TAIWAN PROTESTS NEW AIR ROUTES BY CHINA

Taiwan is seeking to counter China’s unilateral move of opening up a controversial and potentially hazardous commercial aviation route paralleling the mid-line in the Taiwan Strait that serves as the unofficial boundary between Taiwan and China. Without informing Taiwan, China recently opened up a northbound M503 route to commercial aviation traffic, although the southbound M503 has been in use since an agreement between the two sides in 2015. China also opened up two feeder routes to M503. Taiwan is concerned that the routes may provide China with cover for infiltration by military aircraft into Taiwanese airspace. Concern has also been expressed that the move puts China’s commercial aircraft at risk of being mistaken for a military aircraft by Taiwan’s air defense systems, leading to a serious incident that Beijing might use as a pretext for further escalation of tensions.

Taiwan has made its displeasure known to the International Civil Aviation Organization (ICAO), a unit of the United Nations. However, as Taiwan is not a member of the UN or ICAO, the aviation organization has been reluctant to intervene, despite its own requirements that any changes to commercial aviation routes should involve all affected parties. China claims that the route is ICAO approved.

The row threatened to inconvenience Taiwanese expats working in China, as Taiwan reacted by canceling nearly 200 planned extra flights by Chinese carriers China Eastern Airlines and Xiamen Airlines during the Chinese New Year period. Around one million Taiwanese are estimated to work in China and tens of thousands of them will seek to return to Taiwan for the Chinese New Year. The Mainland Affairs Council gave assurances that 418 extra flights by other carriers are being added for the holidays, in addition to 586 regularly scheduled services serving 50 mainland destinations.

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