Taiwan and South Korea have posted weak manufacturing activity in recent months, but deteriorating purchasing managers’ index (PMI) readings would affect Taiwan more negatively than its regional trading rival, DBS Bank Ltd (星展銀行) said.
“Manufacturing PMIs in South Korea and Taiwan fell below 50 in the fourth quarter of 2018,” Singapore-based DBS economist Ma Tieying (馬鐵英) said in a report on Tuesday last week, referring to the threshold that separates expansion from contraction.
The deterioration in PMI was evident in some key areas, such as new orders, export sales and production, which has also put pressure on the customs-cleared exports in the two economies, she said.
“Weak manufacturing PMIs have historically hurt GDP growth rates more in Taiwan compared with South Korea,” Ma said.
Based on the bank’s research, the economist said that Taiwan’s GDP growth weakened sharply in the years that the PMI fell below 50 points for at least half a year.
For instance, Taiwan saw GDP growth on a yearly basis drop below 1 percent for one to two quarters when the PMI contracted for seven and six months in 2011 and 2012 respectively, she said.
GDP growth had even fallen into the negative for two quarters in 2015 after the PMI dropped below 50 points for as long as eight months, she added.
In comparison, South Korea’s GDP growth has historically held up better at about 2 to 3 percent when the manufacturing PMI reading fell below 50 points, which Ma said could be attributed to the relatively strong support from its non-manufacturing sectors, including services and construction.
“Unlike South Korea, Taiwan is heavily dependent on manufacturing and less reliant on its non-manufacturing sectors,” Ma said.
There is growing concern that the contraction in Taiwan’s manufacturing PMI would extend into this year, given the deterioration in global economic conditions, the negative effect of the US-China trade dispute and the weakness expected in the electronics sector for the next few quarters, she said.
However, relatively stable domestic demand, underpinned by a steady labor market, property prices and credit growth, should help offset the weakness in manufacturing in the near term, DBS said, maintaining its GDP growth forecast for Taiwan at 2.2 percent for this year, compared with an estimated 2.7 percent increase last year.
However, “the risk of a downward forecast revision is higher for Taiwan than South Korea,” which is predicted to see GDP grow 2.6 percent this year, Ma said.
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