Taiwan: In the shadow of the Chinese slowdown: Asia Pacific Economic Outlook, Q2 2016 | Deloitte Insights
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Taiwan: In the shadow of the Chinese slowdown

By Dr. Ira Kalish
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April 06, 2016

Taiwan: In the shadow of the Chinese slowdown Asia Pacific Economic Outlook, Q2 2016

April 06, 2016
  • Dr. Ira Kalish
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A drop in Chinese exports is hurting Taiwan, as many of China’s exported products are assembled from components manufactured in other East Asian countries, including Taiwan. For 2016, the question is whether domestic demand will offset weak exports and how closely the recently elected government will work with the mainland.

Two of the biggest issues facing Taiwan’s economy are the slowdown in China and the results of the recent election in Taiwan.

First, consider the Chinese economy. The slowdown of China’s growth has involved a significant deterioration of Chinese exports. In February of 2016, for example, dollar-denominated exports from China were down 25 percent from a year earlier. Many finished products that are exported from China involve assembly of components that are made in other East Asian countries, including Taiwan. This is especially true of electronic components. Thus, weakness of Chinese exports hurts Taiwanese manufacturers. Indeed dollar-denominated Taiwanese exports were down 13 percent in January versus a year earlier, the 12th consecutive month of decline. This was disproportionately due to a drop in exports to China.

Despite trade headwinds, the Taiwanese economy is rebounding following a brief recession in the middle of 2015. The economy grew again in the fourth quarter. This was due to strong growth of consumer spending as well as modest growth of business investment. For 2016, the question will be whether strengthening domestic demand will offset continued weakness of exports. Consumer demand should be helped by a modest increase in wages combined with low inflation, rising employment, and rising confidence. Indeed after a long period of stagnation, real wages are starting to rise, which could indeed set the stage for a consumer-led recovery. Another question is whether export weakness is bottoming. Moderate demand growth in the United States could play a role in this. On the positive side, the latest purchasing managers’ indices for Taiwanese manufacturing have improved since mid-2015, suggesting that the decline in the manufacturing sector is abating. In addition, the rebound in investment in the second half of 2015 bodes well for increased manufacturing output in 2016. Thus, a reasonable forecast is modest but positive economic growth in 2016.

Still, there are risks to the Taiwanese economy, largely stemming from China. One risk is that China’s slowdown becomes deeper. That would hurt demand for Taiwanese products. It could also hurt Taiwanese banks as Chinese companies are the largest foreign debtors of Taiwanese banks. Another risk is that an excessive tightening of monetary policy by the US Federal Reserve hurts global economic growth, suppresses global asset prices, and weakens global credit market activity. In such a scenario, demand for Taiwanese goods would be damaged.

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Written by: Dr. Ira Kalish

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Asia Pacific Economic Outlook , Asia Pacific (APAC) , Economics , Emerging Markets

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