The Taiwanese economy will end the year with underwhelming economic growth of around 1.2%. One of the key problems has been weak exports due to the high cost of funding globally and excess inventory in the semiconductor and electronic sectors.
The good news is that the worst should be over in 2024 as the US Federal Reserve starts easing in the second quarter of 2024. Beyond the cheaper cost of funding globally, demand for electronics and semiconductors should also improve as inventories have been reduced in 2023. All in all, Taiwan’s growth should more than double in 2024 to 2.9%.
Given better global financial conditions and the expectation of a better export cycle, Taiwanese companies should increase their capex in 2024. As regards foreign direct investment, China remains attractive both for green energy, especially offshore wind, but also for artificial intelligence-related projects.
However, geopolitics are becoming increasingly relevant for foreign investors when deciding whether to bet on Taiwan. In particular, the risk of military conflict in the Taiwan Strait is often discussed in the board rooms of major foreign companies considering Taiwan as an investment destination.
As regards consumption, the policy of raising wage growth to 4% for military, civil servants and public school teachers should offer some support against the background of intense outbound tourism, which takes away part of household consumption
As for inflation, it should continue to decelerate from 2.5% in 2023 to 1.6% in 2024, following global disinflationary trends. However, there are still ongoing uncertainties regarding price volatility in agricultural products and extreme weather, which may bring price spikes.
Still, such a movement should not be a hurdle for the Central Bank of the Republic of China (CBC), Taiwan’s central bank, to start cutting once the Fed does but clearly at a much slower pace since the CBC did not follow the Fed fully on its tightening.
In fact, it seems hard for the CBC to cut rates beyond 1.675% from 1.875% today. This should be positive for Taiwan’s housing market.
Given the faster cuts by the Fed than the CBC, the Taiwan dollar has the potential to appreciate against the US greenback, especially if the tech cycle rebound attracts capital into Taiwan’s stock market.
The spoiler of this rather positive outlook for Taiwan is the geopolitical risk. The first obvious one is the presidential elections in January, but this is not the main issue.
Investors mostly worry about China’s reaction to the potential victory of the incumbent party, the Democratic Progressive Party (DPP), but the key problem is much more structural than the result of the elections and boils down to the future of Taiwan, at least from foreign investors’ point of view.
Going back to the elections, they are unlikely to result in a significant shift in economic policies in terms of the fiscal and monetary stance while derisking policies to diversify the economy away from China might not continue if the Kuomintang (KMT) were to win.
So far Taiwan’s exports to mainland China (including Hong Kong) have declined from 40% on average between 2015-2019 to 35% in 2023. Meanwhile, the US is the biggest source of Taiwan’s export orders and the share has surged from 28% to 32% for the same period. What has not yet happened sufficiently is a diversification of Taiwanese investment and trade toward Southeast Asia.
Moving forward, another key challenge for Taiwan is energy transition. Taiwan’s net zero targets by 2050 seem very hard to achieve in the current circumstances, which may also have consequences for Taiwan’s exports, especially those with large carbon emissions as the European Union pushes ahead with its carbon border adjustment mechanism (CBAM).
All in all, the Taiwanese economy should be better in 2024, both growth and inflation-wise, supported by better funding conditions. The elephant in the room, though, is geopolitical risk, especially in this election year but also structurally. A second major challenge is how to navigate Taiwan’s energy transition given its very bold targets.
Alicia Garcia Herrero is chief economist for Asia-Pacific at Natixis.