Taiwan’s economy may expand by 4.5 percent this year, after an estimated mild pickup of 2 percent last year, as subdued global commodity prices would continue to improve terms of trade, which in turn would boost corporate profits and household incomes, UBS Securities said yesterday.
The nation’s terms of trade — the value of its exports relative to imports — have seen a welcome reversal since late 2012, a positive yet overlooked trend, as they are not captured by real GDP, but are particularly important for an open economy like Taiwan, UBS economist Silvia Liu (劉醒威) said.
Falling terms of trade squeeze profits and household incomes, while improving terms of trade boost them, Liu said, adding that deteriorating terms of trade had been the norm for Taiwan since 2000, Liu said.
The improvement propelled a pickup in Taiwan’s gross domestic income last year, with GDP adjusted for gains from changes in terms of trading rising to an estimated 4 percent from 1.7 percent in 2012, Liu said.
The terms of trade could remain favorable going forward, if global commodity prices continue to ease as the UBS view suggests, Liu said.
UBS expects global oil prices — a critical import for Taiwan — to ease by about 7 percent this year. In the medium term, oil prices may normalize below US$100 a barrel, reflecting increased fuel efficiency, technological changes and increased substitution, such as cheap and plentiful natural gas, the Swiss financial service provider forecast.
“This and the gradual improvement in export volume suggest Taiwan should remain in a cyclical sweet spot,” Liu said, in line with forecasts of recovering external demand by other institutions.
Global commodity prices are a critical driver of Taiwan’s terms of trade, with exports accounting for 73 percent of GDP last year, from 53 percent in 2000, Liu said.
That means the prices of internationally traded goods and services now affect a much bigger share of the economy than they did before, the economist said.
More important, prices have moved in a big way, UBS said.
Taiwan’s import prices rose 59 percent from 2000 to 2011, while export prices fell 4.3 percent, as the vast expansion in Chinese capacity put downward pressures on global manufactured goods prices, it said.
The resulting price squeeze weakened incomes and purchasing powers, and explained why companies saw rising sales volume, but falling profit margins and household income for discretionary spending stayed subdued, Liu said.
However, the increase in export volume more than offset the unfavorable twists and allowed Taiwan to maintain respectable economic growth, Liu said.
The Swiss company also expects the Taiwan Stock Exchange index to rally to 9,050 this year, with electronics plays likely outperforming non-tech shares, UBS Securities Taipei branch equities and research head William Dong (董成康) said.