Taiwan likely to grow 2 pct in 2017, although still below potential

The Taiwanese economy is expected to grow by about 2% in 2017, faster than in 2016 but still below potential. Also, the labor market will recover but not significantly, while inflation will remain stable and low at about 1 percent.

According to the IMF’s latest World Economic Outlook, global growth will rise to 3.4 percent in 2017, a modest uptick from 3.1 percent in 2016, and on par with the average growth seen in 2012-15. Electronics exports are critical for Taiwan. The pattern here is heavily influenced by the product cycle in the global smartphone market. The launch of the new iPhone models boosted Taiwan’s electronics exports almost every year in 2007-2011.

"Taiwan’s growth should also pick up next year. We expect 2.1 percent growth in 2017, close to the 2012-15 average of 2.2 percent," DBS commented in its latest research report.

However, the Apple-effect weakened somewhat after 2012, probably because technology started to mature and competition intensified in the global smartphone sector. Taiwan’s exports to China have been stagnant since 2012, when China’s GDP growth dropped to 7 percent and global commodity prices started to languish.

A possible rise in trade protectionism from the developed countries, as a result of Brexit and the anti-trade stance of the US president-elect, is an additional risk. Tariff/currency disputes between the US and China could hurt Taiwan’s exports indirectly.

Further, modestly better GDP growth should benefit the labour market. The unemployment rate, which has been crawling up this year, will likely come off the peak in 2017. The electronics sector accounts for 15 percent of Taiwan’s GDP, but only 8 percent of its total employment, reflecting the relatively high productivity in this sector. Companies in the non-electronics manufacturing and services industries would remain cautious about their manpower plans, absent a substantial improvement in their earnings outlook.

Meanwhile, a modest economic recovery will reduce the need for Taiwan’s central bank (CBC) to cut rates but would not be sufficient to prompt hikes. The output gap will remain negative in 2017 as GDP growth is expected to stay below the potential rate of about 2.5 percent.