The nation's economy is structurally sound although it may face cyclical challenges to see a slowdown, Ian Morris, a HSBC chief economist based in New York, said at a briefing yesterday in Taipei.
"What our economists like about Taiwan structurally is its world competitiveness that's managed to improve in recent years," Morris said.
He was referring to a survey by the Switzerland-based World Economic Forum that last month ranked Taiwan No. 4 for competitiveness among 104 countries, up from 10th place in 2000.
HSBC, the world's second largest financial-service group, forecast Taiwan to report a 6 percent growth in GDP this year, followed by 4.5 percent next year and 3.8 percent growth in 2006.
As the inflation rate is expected to stay low, leveling between 1 percent and 2 percent, Morris said he expects Taiwan's central bank may only raise interest rates up to 2.4 percent by the end of next year.
While many manufacturers have moved to China to take advantage of low costs, Taiwanese products are enjoying high pricing advantages, since Taiwan's patent-to-population ratio is the third highest in the world -- next to the US and Japan, Morris said.
Taiwan, nevertheless, needs to carefully watch China's cooling measures, Morris said.
China's economy is still too hot and may not be able to avoid a hard landing for investments, although it is expected to successfully manage a soft landing for its future economic growth, he added.
Though China is expected to face pressure to loosen a fixed yuan-US dollar link during this week's APEC summit in Chile, HSBC doesn't expect China to appreciate its under-valued currency "in the next couple of years," Morris said.
In contrast, the US dollar is expected to buried "in the bear market for another three years," now that the US is experiencing structural weakness including the largest current account deficit in at least 150 years, he said.
Worries About the US
Based on HSBC's prediction, the US Federal Reserve therefore would continue to raise interest rates to 3 percent in the middle of next year, but the rates will later fall to 2 percent in 2006 when the US may have to tackle a deflationary problem.
"Due to structural problem in the [US] economy, its monetary policy won't go back to neutral," Morris said.
But if crude oil prices rise to US$50 per barrel, non-energy corporate profits in the fourth quarter will be deeply hurt, thus posing a threat to the US economy, he said.
Oil prices should remain below US$40 per barrel, Morris added.