DBS Bank (星展銀行) predicted in a recent report that Taiwan’s economy would expand by 2.9 percent next year, down from 4.3 percent this year, attributing the decreased expectations to export challenges that would affect private consumption.
Taiwan’s economy is on the verge of a technical recession as evidenced by a seasonally adjusted quarterly contraction of 0.6 percent in the third quarter, -Singapore-based DBS economist Ma Tieying (馬鐵英) said.
The fourth quarter has proven equally weak so far, with export demand remaining sluggish and business sentiment fragile because of lingering uncertainties in Europe and the continued global financial volatility, Ma said.
“External headwinds will continue to weigh on the economy in the first quarter with a recovery expected to start in the second quarter at the earliest,” she said.
This backdrop led the Singaporean banking group to forecast an annual GDP growth rate of 2.9 percent for Taiwan next year, significantly lower than the 4.3 percent rate this year, and below the market consensus forecast of 3.5 percent.
Demand from Europe has plunged and will remain listless, with no quick fix to the sovereign debt crisis in sight, Ma said, adding that fiscal tightening in the peripheral economies will depress economic growth in Europe.
The EU accounts for about 10 percent of Taiwanese exports.
China, the nation’s largest trading partner, is heading toward a slowdown next year -- weather it will be in the form of a soft, or hard landing -- as a result of its policy tightening to contain inflation and cool the overheating property and credit markets, Ma said.
“Slowing Chinese demand will mute the benefits of tariff reductions to Taiwanese exporters under the Economic Cooperation Framework Agreement,” Ma said.
Meanwhile, Taiwanese manufacturers will face sharp competition from South Korean peers in the high-technology electronics sector, and that challenge could become tougher if the South Korean won weakens faster than the New Taiwan dollar amid global deleveraging, the economist said.
Taiwanese firms in the plastics, rubber, chemicals and other non-tech sectors will continue to be at a price disadvantage relative to Southeast Asian rivals, who enjoy tariff exemptions under a free-trade agreement with China, Ma said.
An extended period of external weakness will inevitably have a negative impact on the domestic front for Taiwan, she said.
Private investment, driven by machinery and other capital goods purchases, has dropped significantly this year and appears unlikely to stage a strong comeback next year, Ma said.
The knock-on effects of weakening exports will be felt in the labor market as seen in the increased number of manufacturers requiring workers to take unpaid leave to cope with excess capacity, Ma said.
“We expect the unemployment rate to rise by 0.4 percentage points next year, peaking at 4.7 percent in the fall,” she said.
A weaker job market outlook will dampen consumption growth, since household wealth has already shrunk as a result of corrections in asset prices, Ma said.
The central bank is likely to hold the benchmark interest rate unchanged at 1.875 percent next year, or cut it by 25 basis points in the first half, if external challenges deteriorate, Ma said.