MAJOR MACRO ECONOMIC INDICATORS
|2018||2019||2020 (e)||2021 (f)|
|GDP growth (%)||2.7||2.7||1.9||4.7|
|Inflation (yearly average, %)||1.5||0.5||-0.1||1.0|
|Budget balance (% GDP)||-1.9||-1.8||-4.5||-3.0|
|Current account balance (% GDP)||11.6||10.6||14.1||14.5|
|Public debt (% GDP)||33.9||32.7||33.7||32.5|
(e): Estimate (f): Forecast
- Robust external financial position
- Support for R&D through public expenditure
- Consensus on democratic achievements
- 4th largest electronics producer in the world
- Diversified FDI portfolio in Asia
- Exposure to demand from mainland China and the United States
- Stagnant wage growth and low labour productivity
- Lack of competitiveness of the services sector
- Infrastructure gap compared to other advanced Asian economies
- Growing isolation on the international diplomatic scene
Resilient growth despite a resurgence in COVID-19 cases
Despite an outbreak of COVID-19 cases in May, growth has been resilient in the first half of the year, mostly led by the export-oriented manufacturing sector at a time when global demand, especially for electronics, has accelerated. Exports (70% of GDP) have been robust thanks to high demand for hi-tech products and electronic components (semiconductors). U.S.-China frictions, the pandemic and emerging technologies such as 5G infrastructure have spurred chip exports from Taiwan. Investment (22% of GDP) will remain strong and be supported by reshoring of activities to Taiwan and a flourishing semiconductor industry. While trade tensions between the U.S. and China are unlikely to ease and have accelerated with the U.S. crackdown on Huawei Technologies and other Chinese manufacturers, Taiwanese companies - especially tech ones (Quanta, Innolux) - will probably continue to relocate their activities from China back to homeland in order to avoid tariffs from the U.S. and higher labour costs. This move is encouraged by the Taiwanese authorities, with investment incentives implemented in 2019. Domestically, private consumption (44.5%) has been affected by the restrictions in place to curb the COVID-19 outbreak, which in turn weighs on the employment outlook: the unemployment rate stood at 4.5% in July (3.6% in April before the outbreak). Although inflation is back to pre-pandemic levels, it is expected to soften due to deteriorating domestic demand. That being said, the fiscal stimulus (USD 15.2 billion, 2% of GDP) approved in May is expected to mitigate the impact on domestic demand through wage subsidies for SMEs and the self-employed.
Strong external demand will bolster external accounts
The 2021 budget will increase by 4% to support social welfare policies and defence. Defence expenditures (3% of GDP) are set to increase by 10% under the 2021 budget, for national security purposes, as China’s combat drills approach Taiwan. While it will likely remain above its pre-crisis level, the budget deficit is set to narrow, thanks to improved tax collection following a year of slower growth because of the pandemic. The crisis also led to an increase in government spending, notably with a fiscal package worth 5.5% of GDP in order to support growth in 2020. Many support measures, along with the central bank’s preferential loans, were extended into 2021 for businesses hit by the pandemic.
The current account will remain in surplus thanks to a large trade surplus. Exports of electronics, such as semiconductors, have soared on the back of high global demand for 5G technologies and work-from-home devices. External demand is further boosted by a rebound in global economic activity in 2021, which started by that of key trading partners such as China and the United States. Imports, on the other hand, should grow at a slower pace due to soft domestic demand. Taiwan is the fifth largest creditor economy, with a net external position of 200% of GDP and a stock of foreign net assets worth USD 2.3 trillion that generates solid income. Furthermore, the primary income posted a strong surplus in 2020 due to an increase in residents’ income from outward FDIs. This environment should strengthen on the back of the government’s “New Southbound policy” adopted since 2016, which aims at strengthening ties with ASEAN members, South Asia, Australia and New Zealand. The level of external debt (30% of GDP, but entirely private-owed) does not compromise the stability of the island’s external position.
Increasing tensions with China
Pro-independence candidate Tsai Ing-wen won a second term by a landslide in the January 2020 Presidential Election, which followed strong anti-Beijing sentiment after months of social unrest in Hong Kong. Relations with mainland China have soured since Tsai’s Democratic Progressive Party (DPP) came into power in 2016. Tsai’s DPP has remained firm in its conviction that it will not join the “1992 Consensus” that governs cross-strait relations, in opposition to the “One China” principle. As a result, China has resorted to economic measures and an intensification of military exercises to put pressure on Taiwan. Despite these pressures, the President is unlikely to call for a referendum on an official declaration of independence. On the international front, despite a resurgence of cases in April this year, Taiwan has overall been a global role model for managing the pandemic efficiently, without receiving any assistance from the World Health Organization, due to China’s insistence that Taiwan is under China’s jurisdiction. This may accelerate Taiwan’s recognition and visibility as a country on the international diplomatic stage – so far, only 15 countries do so.
Last updated: September 2021