Taiwan: Exports set the stage for growth Asia Pacific Economic Outlook, Q2 2017

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The stage seems set for stronger economic growth, given the healthy recovery of exports. But since Taiwan's economy is heavily dependent on exports to China, any blips in the Chinese economic story are likely to find a reflection in Taiwan's.

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Asia's retail spending boom

Economic situation

Taiwanese exports are rebounding at a healthy pace, setting the stage for stronger economic growth. In recent months, exports to China and the rest of Asia have risen strongly, and those to the United States have also grown at a strong pace, albeit from a smaller base. The Chinese story is the most important. China is Taiwan’s principal trading partner. Indeed, Taiwanese exports to China and Hong Kong combined account for about 39 percent of the total. The stabilization of China’s economy and the improvement in the state of its manufacturing industry have evidently helped boost Taiwan’s exports. Moreover, the rebound in exports will likely have a positive impact on capital spending. Imports of capital goods have accelerated, suggesting that businesses are on the verge of an investment rebound. Going forward, the rebound in exports should continue, as evidenced by the recent uptick in new export orders. Taiwan’s fortunes are, to some extent, tied to the fortunes of the consumer electronics industry, and there is considerable talk about how to diversify the economy so that it becomes less vulnerable to the vicissitudes of the electronics market.

Consumer spending in Taiwan has been growing modestly, a trend that is likely to continue in the coming months. Spending is being fueled by rising employment, itself the result of improved exports. In addition, a strong equity market is boosting consumer wealth. Also, the Taiwanese labor market is relatively tight, and productivity has been rising, thus setting the stage for wage gains that could have a positive impact on consumer spending. On the other hand, wages in Taiwan have been remarkably resistant to improvement, unlike in neighboring South Korea. Thus, it remains uncertain whether an improvement in the export environment will actually generate significant wage gains.

Areas of risk and opportunity

Taiwan’s economic outlook appears positive and, at the least, benign. Yet, risks remain. The biggest risk for Taiwan is that of China failing to avoid a slowdown in economic growth. China has seen rapid growth in debt, even as the economy has decelerated. The result is that the debt is not fueling stronger growth. Rather, it is enabling poorly performing enterprises to stay in business. The risk is that, failure to resolve bad debts will have a negative impact on investment and, consequently, growth in China. That, in turn, would suppress growth in Taiwan.

Another risk is the erection of trade barriers by the US. Even if they are aimed at China rather than Taiwan, it would still have a negative impact on Taiwan, whose industries supply components to factories in China that then produce final products for export. Thus, Taiwan is vulnerable to the state of trade relations between China and the rest of the world.

Of course, Taiwan directly exports to the United States as well. If there is stronger economic growth in the United States, that would be beneficial to Taiwan. The strength of equity markets in the United States likely reflects optimism that a combination of tax reform and deregulation in the United States will boost economic growth. That, in turn, would boost imports from Taiwan and elsewhere.

A longer-term risk to Taiwan is the country’s large dependence on information technology and other high-tech areas. Although much of the assembly of technology products long ago left Taiwan for the mainland, Taiwan continues to engage in the higher-value processes that are a critical element of this industry. About 41 percent of Taiwan’s exports are in this arena. The next downturn in this industry could hit Taiwan hard. On the other hand, expertise in this area will serve the country well as technology continues to become the most important element in the development of most products and services.

Finally, Taiwan faces the same decline in the working age population that is already afflicting most developed economies. In 2016, for the first time, the working age population fell. This will continue. It means that the cost to society of supporting an aging population will grow. For Taiwan, the best way to finance this transition will be to boost productivity growth. That, in turn, will require continued movement up the value chain by investing in innovative technologies that increase each worker’s output. Making Taiwan an attractive place to invest will be critical. Already the country has an attractive workforce, favorable government finances, stable prices, stable government, and a strong infrastructure.