Taiwan: Bleak export prospects, lowering GDP

Taiwan exports contracted a sharp 13.9% yoy in June after declining 3.8% yoy in May. Three aspects in the June release are particularly worrying: 1) tech exports declined by double digits for the first time since July 2012; 2) exports to all key destinations declined; and 3) real exports (nominal/headline exports adjusting for export price) slumped after a brief improvement in May. 

Overall in 1H15, headline exports dropped 7.1% yoy, weaker than the 4.2% yoy decline in 1Q15 and the 2.7% yoy gain in 2014, as external demand disappointed earlier expectations. The continued softness in tech exports is not just due to the ongoing sluggish external demand. Rather, this was due to 1) loss of competitiveness in Taiwan's electronic sector; and 2) China's economic transformation, where China is grooming its own supply chain and reducing its reliance on Taiwan for technology imports. 

"We lowered our Taiwan GDP forecasts to 3.2% yoy (from 3.5% yoy) for 2015 and 3.5% yoy (from 3.7%) for 2016 as headline exports continue to struggle and export recovery remains elusive. Recall that exports are equivalent to about 70% of nominal GDP and are thus the pillar for the Taiwan economy. Our revised forecast is slightly lower than the government's current 2015 GDP estimate at 3.3% yoy," says BofA Merrill Lynch.