In its latest economic growth forecast, UBS AG said the local economy could contract by 1.6 percent next year, revising down its previous estimate of 1.7 percent GDP growth after the local economy contracted by 1 percent year-on-year last quarter.
“We have underestimated the extent of the export slowdown and therefore the implications for domestic demand,” UBS economist Sean Yokota said in last month’s report, which was released on Friday night.
“We have painfully realized that our export assumptions are too optimistic and now assume a bigger slowdown of minus 6.9 percent for next year, compared with our earlier forecast of 1 percent,” he said.
UBS was the second institution to predict that the local economy would stay in a deep recession through next year after Fitch Ratings predicted last month that Taiwan’s economy could contract by 1.7 percent at the same time from a previous estimate of 4.3 percent growth.
Yokota said he believed that a deeper export slowdown would drag domestic demand with it, since the nation’s exports, which take up 70 percent of GDP, will be hurt by falling global demand.
Income earned from exports constitutes about 19 percent of the nation’s GDP, and when the export cycle slows, that in turn reduces income growth and weighs on consumption and investment growth, the report said.
The government’s fiscal stimulus measures could ease the downturn slightly, although to what extent is unclear, the report said.
But the central bank is sure to accelerate its easing policy by adjusting interest rates and allowing a weaker NT dollar, the report said, predicting that the nation’s interest rate would fall to 1.5 percent from 2.75 percent with the next 12 months and the inter-bank overnight rate would fall to 0.8 percent.
Sticking to his prediction of a 25 basis-point cut, Yokota said, however, that he would be surprised if the central bank were to cut another 50 basis points at its meeting on Thursday.
Moreover, to combat falling demand for the nation’s exports, UBS expected that the central bank would allow the NT dollar to hit NT$34 against the greenback by the end of this month and let it rise higher in the first quarter next year before settling down to NT$33.5 by the end of next year.
As the nation’s growth statistics have just started turning negative, USB said that it believed it was too early for the government to look forward to a recovery anytime soon because the economic slowdown was still in its early stages.
Yokota also said he expected the nation’s jobless rate to climb to 5.6 percent after hitting 4.3 percent in October.