Ahead of the Lunar New Year holiday, the Directorate-General of Budget, Accounting and Statistics (DGBAS) reported that Taiwan’s economy grew 2.58 percent year-on-year in the final quarter of last year, indicating that the economy had extended its growth trend for the third consecutive quarter.
The result had not only confirmed a widely expected year-end acceleration following an increase of 2.03 percent in the third quarter, but also helped lift the nation’s GDP growth to 1.4 percent last year, the fastest expansion in four years.
Unsurprisingly, the strong GDP growth last quarter was the result of continued improvements in the nation’s economic activities in recent months, driven by manufacturing amid a strong external demand for electronics.
The major growth engine was gross capital formation which, expanded by 8.24 percent from a year earlier, more than doubling the 3.11 percent increase registered in the previous quarter.
Meanwhile, net external demand — or exports minus imports — contributed 0.37 percentage points to the headline GDP growth, reversing from a deduction of 0.4 percentage points a quarter earlier.
Overall, the economy is likely to remain buoyant in the near term, considering that leading indicators such as export orders and the manufacturing purchasing managers’ index continue to suggest global trade increases.
The DGBAS has maintained its GDP growth projection at 1.87 percent for this year and the National Development Council has set its economic growth target between 2 percent and 2.5 percent.
Nonetheless, growth headwinds remain.
First, private consumption — which rose a lackluster 1.3 percent last quarter compared with 2.5 percent in the prior quarter — is likely to stay subdued as long as wage growth lags behind rising inflation.
Growth of regular earnings for workers increased only 1.3 percent in the first 11 months of last year, while the consumer price index rose 1.4 percent. In addition, new labor laws could add more pressure to inflation this year, while some companies might seek alternative means to lower costs and delay wage increases.
Second, whether exports can sustain the recovery is linked to the new US government. The risks from US protectionism and any political or economic developments that threaten European stability would add extra stress to Taiwan’s trade-reliant economy.
In addition, as China accounted for 40 percent and the US 12 percent of Taiwan’s US$280.4 billion (US$9 billion) in exports last year, avoiding the risk of spillover effects from a trade dispute between the two countries is an important task for policymakers.
Local businesses also need to stay vigilant, because investments in industries like computing, electronics and textiles in China would likely be targeted in the event of a trade war.
Credit Suisse Group AG warned that a potential border tax by the US government could cause a decrease of between 4 percent and 5 percent in Taiwanese exports, reducing the rate of GDP growth by up to 0.8 percentage points.
Third, manufacturers could even consider building factories in the US or relocating to Southeast Asia to take advantage of the Taiwanese government’s new “southbound policy” or moving production back to Taiwan.
However, serious challenges to relocation remain, such as supply-chain support, an amicable investment environment and general flexibility and efficiency of resource allocation.
Despite calls for the government to reshuffle its economic and financial team to prepare for the challenges ahead, during the latest Cabinet shake-up, the incumbent economics, finance and national development ministers remained in their posts.
It will soon be apparent whether policymakers are serious about the economy.
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