Taiwan’s trade-dependent economy continues to struggle with lackluster growth, due to weak demand for its exports, even as domestic consumption also performs poorly. GDP growth for the first quarter this year was 1.7 percent year over year, similar to the 1.3 percent growth for the whole of 2012 but far lower than the 3.3 percent growth predicted for Q1 2013 by government agencies. While the government is taking a series of policy measures to revive the economy, including launching a stimulus program, growth is likely to be limited to the 2–3 percent range for the year.
Exports account for nearly three-quarters of the Taiwanese GDP and have been significantly challenged by the slowdown in the United States, European Union, and more recently China. The situation has been exacerbated by the depreciation of currencies in Japan and South Korea, Taiwan’s competitors in the electronics market, who together account for 28 percent of Taiwanese exports. In Q1 2013, Taiwan’s trade balance shrank a sharp 63 percent year over year, as exports grew just 2 percent compared to a 4 percent expansion in imports. Exports were hit by a 6 percent year-over-year decline in sales to the United States and European Union (19 percent of exports). With April 2013 sales to mainland China and Hong Kong (40 percent of exports) coming in flat, Taiwan’s trade situation looks unlikely to improve significantly in the short term.
Meanwhile, domestic consumption has also stalled. While private consumption grew a low 0.3 percent year over year in Q1 2013 as a result of sluggish wage growth, government consumption fell 0.5 percent. The outlook for private and government consumption for the rest of the year is also not encouraging. As a result of subdued demand externally and internally, Taiwan’s industrial production index registered its third consecutive month of year-over-year decline in April 2013. With the May 2013 purchasing managers’ index coming in at 47.1, the lowest in eight months, business conditions only appear to be deteriorating further.
In order to revive the economy, the Taiwanese government unveiled an economic stimulus package of TWD 3.2 billion in May 2013 to boost consumption and investment over the next five years. The package earmarks TWD 1 billion for supporting start-up companies. Another TWD 400 million is allocated toward replacing public transport vehicles and incentivizing spending on items such as energy-efficient home appliances and cars. Projects to build a new port and expand an international airport are also being considered. Specifically to improve foreign direct investments, which fell 14.8 percent year over year in the first four months of 2013, Taiwan plans to establish five free economic zones (FEZs). The FEZs are expected to offer investors a more liberal credit, land, labor, and taxation environment. In other measures, Taiwan’s cash-rich life insurance companies will now be allowed to invest in public construction projects. Visa regulations will also be eased for Chinese travelers to encourage trade and tourism.
GDP growth for the first quarter this year was 1.7 percent year over year, similar to the 1.3 percent growth for the whole of 2012 but far lower than the 3.3 percent growth predicted for Q1 2013 by government agencies.
Furthermore, Taiwan is taking several steps to bolster exports. The government is working to forge free-trade agreements (FTAs) with Singapore, New Zealand, and the United States. The FTAs are aimed at diversifying Taiwan’s trade, which currently relies heavily on China, as well as countering competitor South Korea, which has already established agreements with important trade partners such as the United States and European Union. In addition, the central bank has increased US dollar purchases to prevent the Taiwanese dollar from becoming even stronger than the Japanese yen and the South Korean won.
However, the immediate impact of all these policy efforts to improve the Taiwanese economy appears limited. Not only is the stimulus program’s spending spread over five years, but the success of the FEZs is also uncertain, given strong competition from established economic zones in neighboring China. In addition, the FTA with the United States, potentially the most impactful trade agreement for Taiwan, is likely a long way from materializing, due to several contentious issues such as the protectionist approach of certain segments of Taiwanese industry. Even the central bank’s currency intervention measures need to be careful to avoid any sharp fall in the Taiwanese dollar, which could bloat the country’s import bill and further jeopardize a trade balance already hit by sluggish exports.
Meanwhile, the government faces political challenges domestically and internationally. At home, the government’s moves to expand Taiwan’s nuclear power capacity and reform an ailing public-pension system by potentially hiking out-of-pocket contributions and lowering certain benefits are facing resistance. In the larger region, Taiwan’s relations with the neighboring Philippines, a major trade partner, are strained over territorial disputes in the South China Sea.
All in all, 2013 is a challenging year for Taiwan, as an immediate resolution of its economic or political problems appears unlikely.