Taiwan Braces for Slowdown

Although the pace of growth is decreasing significantly, Taiwan is projected to fare better than most economies in 2023.

Economic prospects were looking spectacular for Taiwan in 2021. As a global chip shortage fueled demand for Taiwanese electronics and semiconductors, its economic growth rate of 6.45% was the fastest pace since the rebound from the global financial crisis in 2010.

But these tailwinds can’t last forever; Taiwan now faces an economic slowdown in 2022 and 2023. The government’s Directorate General of Budget, Accounting and Statistics (DGBAS) projects GDP growth of 3.06% this year and 2.75% in 2023, while the comparable International Monetary Fund (IMF) forecasts are 3.3% and 2.8%. Less optimistically, Ma Tieying, a senior economist with the Development Bank of Singapore (DBS) Group Research, puts the figures at 2.9% for 2022 and 2.3% for 2023.

“Next year there will be a notable slowdown, mainly due to macroeconomic conditions,” says Ma. She expects the impact to be especially noticeable in the tech sector.

Globally, fears of a coming recession are widespread. The world economy faces many challenges, including aggressive monetary tightening policies in the U.S. and skyrocketing inflation in European nations. The increased cost of borrowing is also likely to drag down global economic activity.

Energy shortages and energy price volatility fueled by Russia’s ongoing war in Ukraine are souring growth in Europe. Meanwhile, China’s economy has been disrupted by sporadic Covid-related lockdowns, and Taiwan’s own growth could be hampered by new American restrictions on semiconductor exports to China.

In light of these challenges, the IMF forecasts global GDP growth to slow from 6% in 2021 to 3.2% in 2022 and 2.7% in 2023. It also sees U.S. economic growth slowing from 5.7% last year to 1.6% in 2022 before reaching a low of 1% in 2023. GDP growth in the Eurozone is projected to drop from last year’s 5.2% year-on-year (YoY) to 3.1% this year and 0.5% next year.

When consumption economies like these sneeze, export economies like Taiwan catch a cold. In the coming years, Taiwan will face the challenge of strengthening economic inputs outside electronics exports.

Like many other economies, Taiwan is affected by rate hikes in the United States. The U.S. is in the uncomfortable position of battling surging inflation at a four-decade high, fueled by supply and demand imbalances relating to the pandemic and rising food and energy prices, while also needing to ensure economic growth and unemployment do not worsen.

In early November, the Federal Reserve raised its key interest rate by another 0.75% after inflation clocked in at 8.2% on an annual basis. It was the sixth consecutive rate hike for the Fed, a cycle that has not been seen since the inflation-fighting days of the early 1980s. Chairman Jerome Powell said Americans could expect more rate increases, although perhaps not of the same magnitude.

“The Fed is raising interest rates very aggressively,” notes Liang Kuo-yuan, a director at Yuanta Bank. And these rate increases are making waves in the Taiwan economy.

The New Taiwan Dollar has taken a battering from the Fed’s rate hikes. The Chung-Hua Institution for Economic Research (CIER) predicts Taiwan’s currency will depreciate to an average of NT$29.84 against the greenback this year, down from NT$28.02 in 2021. In 2023 it is expected to depreciate further to NT$31.09 against the dollar. Major currencies are all depreciating against the dollar, with the international index reaching a 20-year high.

Taiwan’s inflation levels this year, although far below those in the U.S. and Europe, were considered unusually high – the Consumer Price Index (CPI) posted 3.04% YoY growth from January to October. Taiwan’s Central Bank said in September that global supply chain bottlenecks could be expected to begin alleviating next year. Additionally, many global institutions expect prices of oil and other raw materials to go down on softening demand. As a result, the bank expects the CPI to rise by an average of 1.88% in 2023.

The Central Bank has subsequently engaged in a tradeoff between rate hikes to combat inflation and New Taiwan Dollar depreciation caused by capital outflows to the U.S. At the same time, it has been careful not to set interest rates so high that it puts pressure on low-income earners’ indebtedness amid Taiwanese wage stagnation.

The bank has made three consecutive moderate rate hikes over the last three quarters. In the latest hike in September, the discount rate was raised to 1.625%, the rate for refinancing secured loans to 2%, and the rate on temporary accommodations to 3.875%.

Economists broadly expect another rate hike of 12.5 basis points in December, and some economists, such as Liang Kuo-yuan, president of the Yuanta-Polaris Research Institute, expect another increase by 12.5 basis points in March. After that, says Liang, the Central Bank will probably maintain the discount rate at 1.875% as inflation subsides.

Standard Chartered bank economist Tony Phoo warns that if the Central Bank adopts a tighter monetary policy, it “could inhibit recovery of consumption and domestic demand,” a likely key driver of growth as exports weaken. Phoo adds that Taiwan’s property market is also cooling, which means the Central Bank can afford a looser monetary policy.

Decreased demand

The slowdown overseas is already reflected in demand for Taiwan’s exports, which account for 70% of its GDP. Taiwan is one of Asia’s leading technology exporters and a key supplier to Apple, which means its trade data is seen as an important gauge of global tech demand.

Although Taiwan’s exports grew 12% YoY from January to October, monthly growth figures measured YoY indicate a decidedly downward slide. In September, exports dipped to minus 5.3%, ending a 26-month growth streak. Export growth was still in negative territory in October at minus 0.5% YoY.

China and Hong Kong were Taiwan’s major export markets in October at 36.8% of the total, including electronic components that see their final assembly in China before being shipped off to other places. Exports to China and Hong Kong dropped by 9.2%, largely in favor of other markets. The ASEAN nations received 16.8% (+11%) of Taiwan’s overall export share in October, while the U.S. received 16.1% (+3.1%), Europe 9.5% (+1.5%), and Japan 7.9% (+18.7%).

Export orders, a leading indicator, saw a decline in October. According to the Ministry of Economic Affairs (MOEA), export orders that month contracted 6.3% YoY to US$55.4 billion – the sharpest pace of decline in about three years. Taiwan’s Industrial Production Index, a gauge of domestic manufacturing activity, has shown monthly declining figures in 2022. It decreased by 4.8% in September compared with the same month a year ago, the MOEA said.

The tightened American monetary policy, Taiwan Strait tensions, and more restrictive American controls over Taiwanese semiconductor exports to China have caused global funds to pull money out of Taiwanese equities this year, in what is on track to be the biggest annual outflow in more than two decades.

As of November, the Taiwan Stock Exchange Index had fallen about 30% from a record high in January, ranking among the world’s worst-performing stock markets this year. Global funds have pulled more than US$46 billion from local equities this year, according to Bloomberg.

The Financial Supervisory Commission this fall beefed up curbs on short selling, and Taiwan’s Financial Stabilization Fund had supported the market with over NT$10 billion of securities purchases as of the end of September.

Given the drop in global demand, many tech companies are also looking to reduce or maintain their capital expenditures in 2023, says Standard Chartered’s Phoo. “We don’t see this as a major driver of GDP growth next year.” Private fixed-investment growth in Taiwan is projected to decline from 19% in 2021 to 5.8% in 2022 and 1.49% in 2023, CIER has found.

China’s changing role

The IMF forecasts China’s GDP growth at 3.2% for this year – its second-lowest level since 1977 – down from 8.1% last year. It expects the 2023 level to be 4.4%. Covid infections and Beijing’s stringent “zero-Covid policy” have caused serious disruptions to the Chinese economy and global supply chain bottlenecks. In addition, China is facing a crisis in its real estate sector due to overbuilding and heavy debt.

The Chinese “slowdown is expected to have important spillovers to the rest of Asia through trade and financial links,” the IMF said in a report in October.

China is still Taiwan’s largest destination for foreign direct investment (FDI), with about US$5.9 billion of approved FDI going across the Strait in 2021. But Ma of DBS points out that the level of new investment in China has decreased significantly over the years. Around 70% of Taiwan’s FDI flowed to China a decade ago, while in the last three years, it has averaged about 30% as more attention has been focused on Southeast Asian countries, she says.

“Taiwan investors have a cautious stance when it comes to expanding operations in China,” Phoo notes. Taiwanese businesspeople are uncertain about whether China’s strict anti-Covid policies will remain in place for 2023, as well as the direction of U.S.-China relations.

The Taiwan government is likely to look for new free trade deals to further reduce its economic reliance on China, says Ma. Diplomatically isolated Taiwan has been unable to sign free trade pacts with most nations owing to Chinese pressure. Taiwan has also been excluded from the China-backed Regional Comprehensive Economic Agreement (RCEP), the world’s most extensive trade agreement, which came into effect on January 1.

Taiwan last year applied to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) less than a week after China submitted its own application. Taiwan’s bid is currently in limbo as member states are understood to be busy handling the UK’s application.

Looking to bolster bilateral ties, Taiwan and the U.S. held talks in New York in mid-November as part of the newly unveiled U.S.-Taiwan Initiative on 21st-Century Trade. “We look at these kinds of developments positively,” says Peng Su-ling, director of CIER’s Center for Economic Forecasting. The two sides are scheduled to continue discussions on 11 identified topics, including good regulatory practices and trade facilitation. 

But Phoo notes that while free trade pacts are good for Taiwan, they are not the sole factor in determining Taiwanese export competitiveness. Standard Chartered’s clients tend not to compete with RCEP nations head-on by offering similar products, and instead focus on products where they have a distinct competitive edge, he says. “It’s more about innovation and being relevant, as well as cost efficiency, despite RCEP.”

The Tsai Ing-wen administration in the past few years has encouraged Taiwanese companies to reshore operations from China to Taiwan, a trend that began in 2018 with the start of the U.S.-China trade dispute. However, Phoo is among the economists who have concluded that “the momentum from reshoring activities has probably come to an end.” 

When considering setting up shop or expanding in Taiwan, businesses have long complained about Taiwan’s “five shortages” – land, labor, water, electrical power, and talent.

Kevin Wang, an economist at Taishin Securities Investment Advisory Co., points to land shortages in the central and southern Taiwan science parks as making Taiwan less attractive to returning businesses. He says the situation has prompted the government’s National Development Council to come up with plans to expand existing manufacturing sites or create new ones.

Companies may be even leerier to expand in Taiwan following China’s unprecedented military exercises around the island in August, in protest to a visit from U.S. House Speaker Nancy Pelosi. With the cross-Strait factor added to worries about the five shortages, the risk calculation may have risen to a level that many companies will find hard to accept, Liang argues.

The good news

Although the Taiwan economy faces many potentially destabilizing factors, the outlook is hardly one of doom and gloom. Taiwan’s projected growth numbers, although significantly lower than those of 2021, are higher than many economies dare to dream of for next year.

“We don’t think there will be a recession in Taiwan,” says Ma of DBS. “We think it can be avoided. Although Taiwan’s reopening [of borders] is slow compared with other Asian countries, it will have a beneficial impact.”

Ma also notes that the downturn in tech demand is a typical cyclical adjustment in this sector. She says global semiconductor sales have exhibited a growth trend since 2020, and global fab spending has been in an expansionary mode. Now, inventory corrections and destocking can be expected to continue into the first half of next year, in her opinion.

On the bright side, Taiwan’s easing of border restrictions should provide a boost for domestic economic activity next year. As part of the government’s gradual easing of restrictions, travel quarantines were lifted in mid-October for incoming visitors, and the weekly cap on visitor levels was increased to 150,000 on a trial basis before being completely removed on December 10.

The increased inbound tourism and business travel will partially offset expected contractions in manufacturing. The Taiwanese economy is additionally expected to be bolstered by new or significantly increased spending on local services in a wave of post-pandemic consumption.

Taiwan’s pandemic-related travel restrictions seriously hurt tourism and related industries during the past three years. After receiving just over 11 million visits in 2019, Taiwan saw the figure fall to under 1.4 million in 2020. MOEA statistics show that food and beverage sales decreased by 6.37% last year, the steepest annual drop ever, when rules were introduced banning indoor dining and entertainment due to Taiwan’s first large Covid outbreak.

Food and beverage sales have since then rebounded. Sales surged by over 43% to NT$78.6 billion in August compared with the same month a year earlier, spurred by Father’s Day activities and school vacations. In the latest data, retail trade sales in September increased by 7.5% YoY to NT$352.4 billion, and sales of food and beverages rose by 27.5% month-on-month.

Overall, private consumption grew 7.49% YoY in the third quarter, the highest rise in almost two decades, which helped the local economy weather the decline in exports. After a 0.31% drop in private consumption last year, CIER forecasts growth of 3.31% this year and 4.69% next year.

The improved health of the service sector means that despite the decline in tech manufacturing, employment figures should be stable in the coming year or even pick up slightly, though salaries for service industry employees tend to be significantly lower than for engineers. DGBAS has calculated the seasonally adjusted unemployment rate in September to be 3.64%, with total unemployment of 433,000 people. Unemployment figures have remained stable throughout 2022 in the 3.6% to 3.8% range.

Salary levels are also increasing, albeit at a snail’s pace. According to DGBAS, in July the average earnings, including irregular earnings for all employees, was NT$58,355, an increase of 5.4% YoY.

The Ministry of Labor announced in September that starting in 2023, the minimum monthly salary would rise by 4.55% from NT$25,250 to NT$26,400 and the minimum hourly wage by 4.76% from NT$168 to NT$176. Officials said the increase is aimed in part at offsetting the impact of inflation on low-income earners.

Renewable opportunities

Many economists interviewed pointed to Taiwan’s push to go green as a potential economic driver in the future. But the renewable sector, like any new industry, will need time to grow. “Everyone is looking for the next trillion-dollar industry,” says Taishin’s Wang. “However, having a trillion-dollar industry requires a long gestation time.”

Ma of DBS points out that roughly 90% of Taiwan’s energy supplies are imported, with renewables accounting for around 5% of the energy mix. Besides the national security concerns behind Taiwan’s efforts to develop renewable energy sources, the government has also pledged to phase out nuclear power by 2025 and has net zero emission goals for 2050. There are many incentives for the government to emphasize renewables, and the industry “has very big room to grow,” Ma says.

Standard Chartered’s Phoo sees the same potential, noting that Taiwan continues to invest in wind farm technology. He also cites government plans announced in March to end the sale of new combustion-engine passenger cars and scooters by 2040, saying this will attract investment into electric vehicle (EV) projects.

“Government-subsidized EV-component industries are able to perform relatively well in this global economic downturn, but the output value is not large, and it still remains a small driving force in the economy,” Taishin’s Wang says. Other potential solid contributors to the Taiwan economy over time are considered to be innovative products related to the Metaverse and artificial intelligence.