As the world struggles to overcome the Covid-19 crisis, Taiwan is a rare oasis with hardly any domestic mobility restrictions.
The early containment measures in February took a toll on the Taiwanese economy but not as much as the global lockdown in the second quarter, as shown by the recent publication of Taiwan’s second-quarter growth figures, which turned out to be negative but only slightly.
As well, the prospects are positive for the second half of the year, particularly in two sectors, semiconductors and biotech. The reasons for the tailwinds are the 5G (fifth-generation telecom technology) roll-out and demand for Covid-19-related biotech products.
Looking at the situation of the Taiwanese economy in more detail, GDP growth slid from 1.6% in the first quarter of 2020 to minus-0.7% in the second quarter. That outcome is still very positive compared with Asian peers, let alone Europe or the US. The reason is the much smaller virus-containment mobility constraints in Taiwan, which has limited the downward pressure on consumption.
The escalation of the pandemic globally has also disrupted Taiwan’s exports but much less so than for its competitors, such as South Korea. The silver lining comes from investment, which has speeded up. This is not only public investment but also private, as inward foreign direct investment has accelerated, reaching 4.6% of gross domestic product, driven by repatriated profits being invested domestically, but also European FDI.
Despite the short-term turbulence, Taiwan’s outlook for the second half of 2020 remains moderately optimistic. The first reason is that there has not yet been a second wave of Covid-19, which differentiates Taiwan from the fate of Hong Kong, Japan or Singapore.
Second, export orders of ICT (information and communication technology) and electronic products have sprung back significantly, as well as corporate revenue.
Last, home prices have continued to grow, with a low vacancy rate for office space and an uptick in industrial land prices.
With a very mild impact of Covid-19 on domestic mobility and the structurally smaller dependence of the Taiwanese economy on international visitors, its central bank is likely to keep its powder dry for the time being, especially under the very low interest-rate environment.
Together with the better global risk sentiment and bigger foreign capital inflows, the Taiwan dollar has remained relatively strong. It is hard to see how this trend might change any time soon, as it probably fits the central bank’s intentions.
The reasons are twofold. First, there is a risk of the US administration accusing Taiwan of currency manipulation. Second, exports have held up well given the circumstances. In any event, a very rapid appreciation of the currency is also not in the cards.
All in all, I expect the Taiwanese economy to grow this year, one of the very few bright spots globally, with 1.5% GDP growth in 2020 and 2.9% in 2021. The most immediate risk is a second wave of Covid-19, but a worsening global situation will also be detrimental even if Taiwan manages to isolate itself sanitarily speaking.
More structurally, the ongoing global transition toward “Industry 4.0” will continue to lift global demand for Taiwan’s 5G-related exports and data centers. At same time, Taiwan’s green energy plan should continue to boost investment over and above Taiwanese companies’ repatriation of profits from the rest of the world.
Alicia Garcia Herrero is chief economist for Asia-Pacific at Natixis.