Taiwan’s economy is faring better than expected so far this year, but growth momentum might not hold in the second half, as mounting trade frictions, currency appreciation and sluggish domestic demand weigh on the outlook, Cathay Financial Holding Co (國泰金控) said yesterday.
Working with researchers from National Taiwan University, the conglomerate kept its growth forecast for this year unchanged at 2.8 percent, as exports were stronger than expected, but the momentum might cool sharply once front-loading shipments fade, National Central University economist Hsu Chih-chiang (徐之強) said on behalf of the research team.
“Taiwan’s exports outperformed expectations, thanks to active inventory building by global clients to cope with potential US tariff hikes,” Hsu said.
Photo: CNA
The front-loading runs counter to weak seasonality traditionally seen in the first half of the year, but is not likely to continue, especially when US tariffs kick in, he said.
Exports, the main growth driver, accounting for more than 60 percent of GDP, surged 24.3 percent year-on-year to US$229.96 billion in the first five months of this year, far above the government’s forecast, on unabated demand for advanced chips and information and communication technology products.
However, if Washington’s tariffs escalate beyond 25 percent and the New Taiwan dollar appreciates further, exports and corporate investment could attenuate, Hsu said.
The NT dollar has risen 7.8 percent against the greenback since last month, reaching NT$29.52 in Taipei trading yesterday.
The currency’s rally is connected to exporters hedging US dollar-denominated receivables, and speculative activity in foreign currency swaps and forward markets, Hsu said.
The central bank is expected to leave interest rates intact on Thursday when its board members meet, with a forecast for sturdy GDP growth and benign inflation, he said.
Nevertheless, the NT dollar has soared by more than 10 percent this year and continued appreciation could pressure export competitiveness and cloud the second-half outlook, he said.
While the central bank aims to maintain the stability of the currency market, it cannot reverse the NT dollar’s rise, if it is a global trend with fundamental support economically, he said, betting on a gradual rise for the NT dollar.
“If Taiwan’s economy cools faster than expected — particularly with two consecutive quarters of contraction — there is a chance the central bank would consider cutting rates,” Hsu said.
The research team also voiced concern over slack private consumption and the looming effects of potential trade barriers.
With external demand peaking and domestic spending stalling, policymakers face a delicate balancing act to support growth without fueling volatility, the research team said.
Hsu said he expects the US Federal Reserve to make two rate cuts this year, one in September and another in December.
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