Taiwan may be ending 2016 on a whimper, having averaged just 0.8% year-on-year economic growth in the first three quarters, but the stars seem aligned for a moderately happier 2017.
Looking ahead to 2017, growth should improve but only modestly. There should be less pressure on the central bank and government to pursue short-term stimulus and policies are likely to focus more on long-term structural issues.
Here are some key projections for the year ahead that promises a rosier 2017:
1. GDP growth to reach 2% in 2017
As a small and open economy, Taiwan’s fate is tied closely to the global growth cycle. A projected 3.4% global growth next year bodes well, and its economy could be further buoyed by the rebounding electronics sector. As a key part of the supply chain for Apple’s iPhone products, a widely-anticipated product redesign and release slated for 2017 could significantly boost Taiwan’s electronic exports. Although its economy is expected to grow by 2% in the coming year, stumbling blocks remain in the horizon – like China’s enduring growth deceleration and rising trade protectionism from developed economies like Europe and US.
Taiwan in Focus: Outlook for 2017 1:43
2. Unemployment will ease slightly
A recovering economy spells good news for a country plagued by rising unemployment in recent years, but the improvement in the labour market will not be significant The electronics sector accounts for 15% of Taiwan’s GDP but just 8% of its total employment. Hence, growth propelled by electronic exports may not mean much for majority of Taiwan’s workers. Employers in non-electronics industries, are likely to keep a conservative view of their manpower plans.
3. Overall domestic inflation will remain stable and low
In the absence of a strong recovery in the labour market, wages will stagnate for many. Even for the recipients of a 5% minimum wage hike, the impact will not be discernible. The silver lining? A wage-push inflation is unlikely, and inflation is likely to maintain at the current level of 1%. Unfortunately, energy prices are likely to climb next year. Hopefully, its impact on consumers will be limited by a decline in food prices.
4. Taiwan’s central bank to refrain from raising interest rates
The island’s moderate economic rebound next year still falls short of its potential rate of 2.5%. Together with a stable inflation rate, the need for Taiwan’s central bank (CBC)’s intervention is unnecessary. In the coming year, the central bank will continue to focus on domestic fundamentals and keep short-term rates low.
5. Outbound investments remain large
Relatively weak domestic (versus global) growth could bring a rise in outward direct investment by Taiwanese companies. The government has been pushing for the “New Southbound Policy” to assist Taiwanese companies to invest in Southeast/South Asia. steer companies towards these emerging markets. While domestic capital outflows are often viewed negatively, the reality, however, is that outward investments actually allows Taiwan to tap the relatively strong growth opportunities in overseas markets and boost its national incomes.
6. Property prices remain high in the foreseeable future
Thanks to low interest rates, property prices are likely to remain high next year. As the pace of declining property price slows, prospective owners will have to hold out much longer, perhaps past 2017, before the property market becomes more favourable for home buyers. The outlook for the property market will also be contingent on demographic trends like the rate of urbanization and nuclear family formation.
7. Government policies will focus on structural issues
A modest economic recovery reduces the central government’s need to pursue fiscal stimulus and makes it easier to manage public finances. An overall cyclical improvement in Taiwan’s macroeconomics environment enables the government to focus on long-term structural issues and reform. Key elements of President Tsai’s reform plan include industrial innovation, trade diversification and economic/social fairness. Next year will see the implementation or more initiatives similar to the “Five Innovative Industries Plan” and the “New Southbound Policy” that will support Taiwanese companies in both its local and overseas ventures. Beyond the economics, the government will also prioritize social policies like pension reform, elderly care, youth employment and social housing for next year’s national agenda.