Taiwan's growth remains disappointing

October industrial production came in weaker than expected. The year-onyear growth contracted 6.2%, worse than the -5.5% in September and the consensus forecast of -5.4%. This also underperformed the export orders data released earlier (Oct: -5.3%). 

The mismatch between export orders and industrial production is worth noting. From the short-term cyclical perspective, inventory overhang may have weighed on output growth. In the key electronics sector, the inventory-to-shipment ratio has remained above the par level of 1.0 for more than half a year. Despite the arrival of seasonal demand in this sector, excessive inventories need to be digested first before output growth expands again. 

Some longer-term factors might also be at play. The relocation of production lines by Taiwanese manufacturers to emerging markets naturally results in a widening of the gap between export orders and domestic production. Meanwhile, the maturation of supply chains in China enables the mainland-based Taiwanese firms to source intermediate goods from Chinese suppliers, which also reduces the need for imports. 

Whether cyclical or structural factors played a bigger role, the implication for the short-term growth outlook is negative. Note that industrial production still picked up modestly on the sequential basis in Oct (0.7% MoM sa). There remains a good chance that real GDP will show positive growth in QoQ terms in 4Q. But the on-year GDP growth could stay marginally negative in 4Q, which continues to fuel market talk about a technical recession.