UBS AG recently revised down its growth forecast for the nation’s GDP this year from 4.5 percent to 4.1 percent, and nearly halved its projection for next year’s growth as the risk of a global recession increased.
The biggest bank in Switzerland now expects Taiwan’s export-reliant economy to post a modest growth of 2.7 percent next year, down from 4.7 percent, after the global economic backdrop deteriorated over the past few weeks.
“We have lowered our growth projections to 4.1 percent and 2.7 percent for this year and next year,” the investment bank said in a report issued last week.
Taiwan, as one of the more open and leveraged economies in Asia, would prove particularly vulnerable as the risk of a global recession continues to increase, the report said.
The move made UBS the latest foreign banking institution to trim Taiwan’s GDP growth forecast after Morgan Stanly, Barclay Capital, ANZ and JPMorgan.
The new estimate factors in four quarters of below-trend growth, including a quarter or two which could see year-on-year contraction, the report said.
“Exports remain critical even though domestic demand has gained weight in Taiwan’s GDP makeup,” said Kevin Hsiao (蕭正義), head of UBS Wealth Management Research in Taiwan.
The stuttering US and European economies will prompt companies to cut back on investment expenditures, which in turn would weigh on consumer spending, Hsiao said.
The Taiwanese consumer has remained resilient thus far as private consumption grew 3.8 percent year-on-year in the first half of this year, thanks in part to a still stable labor market, the report said.
The resiliency is likely to change if exports decline rapidly and the downturn stretches over a long period of time, the report said.
“The unemployment rate, having stabilized at around 4.4 percent, will likely stop easing or even tick up,” the report said. “This and the negative spillover on household disposable income mean the consumer will not be spared.”
Slower economic growth led UBS to slice its inflation forecast for Taiwan to 1.7 percent for this year, from 2 percent.
UBS expects the central bank to raise key interest rates by 12.5 basis points next month and stay on the sidelines through the first half of next year until the global economy stabilizes.
This projection is based on the world’s economy expanding only 1.9 percent next year, in contrast to zero growth in a worst-case scenario, which would hurt Taiwan even more, the report said.