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UBS slashes forecast for GDP growth to 3 percent

Comparison * JP Morgan Chase has forecast GDP growth of 3.8 percent. * Morgan Stanley has said it expects 4 percent GDP growth. * Academia Sinica forecasts 3.74 percent GDP growth. * The Directorate General of Budget Accounting and Statistics expects the economy to expand by 3.63 percent.

UBS Securities Asia Ltd announced yesterday that it has cut its forecast for the nation's economic growth forecast to 3 percent this year, the lowest among its peers, citing weaker-than-expected first quarter growth and declining export momentum.

"Taiwan may struggle a little bit for the next few years," Duncan Wooldridge, executive director of UBS investment research on Asian economics, told a press conference in Taipei yesterday.

The Swiss securities house revised downward its forecast for Taiwan's GDP growth this year to 3 percent from a 4 percent prediction made in the middle of last year, after a worse-than-expected economic performance of only 2.54 percent growth in the first quarter of this year.

It will be difficult for the economy to improve rapidly in the second half of this year, in light of export growth that is expected to fluctuate between 5 percent and 6 percent this year, down from an impressive 21 percent last year, Wooldridge said.

Export growth is being depressed by the global factors. These include the US' huge current account deficit -- equivalent to some 60 percent of the country's GDP -- which will impact its consumption of Taiwan's exports in the future, and China's growing exports of downstream goods as its manufacturing capacity improves, which is putting pressure on Taiwan's exports, the economist said.

UBS Securities' GDP growth forecast of 3 percent is the lowest prediction among investment banks. JP Morgan Chase Bank has forecast 3.8 percent growth, and Morgan Stanley last month said it expected 4 percent growth.

The Academia Sinica yesterday also cut back its GDP forecast, to 3.74 percent from 4.05 percent, out of concern that skyrocketing oil prices may hurt exports. This followed cuts to forecasts by the Directorate General of Budget, Accounting and Statistics, which trimmed expectations for this year's economic growth to 3.63 percent growth from a previous prediction of 4.21 percent last month.

The nation's central bank is expected to hold to a moderate tightening policy.

In light of slackening economic growth and exports, the central bank may continue its soft interest rate policy by raising benchmark interest rates by 0.125 percentage points at the month's end, he predicted.

As a result, economic growth will mainly depend on domestic demand, centered on the construction and property sectors. These segments have been bolstered by low interest rates and rising house prices, as well as low levels of household debt relative to disposable income, according to the economist.

Meanwhile, the Swiss securities house said it remained cautiously optimistic about the local bourse for the third quarter, after Morgan Stanley Capital International's reweighting on May 31, which attracted overseas funds and appeared to revitalize the TAIEX.

The revaluation of high-tech stocks has boosted share prices by 20 percent on average, which is an encouraging sign, said Michael Chin, managing director of UBS Securities Taiwan Branch.

Other factors that may boost stocks include ongoing inventory adjustments and soon-to-be-released earnings reports in the US market, which should be a catalyst for the TAIEX in the quarter ahead, Chin said.

Chin declined to give a forecast for the TAIEX benchmark index. Some local investment trust companies, including International Investment Trust Co Ltd (國際投信), reportedly have predicted that the local bourse may reach 7,000 points in the second half of this year.
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