The recovery in household demand has been much more subdued, despite government support measures.
Private consumption fell by 2.5% in 2020 and did not increase in 2021 (-0.3%). It was kept back by the various waves of Covid-19 and the continuation of stringent mobility restrictions (the strictest lockdowns took place in the summer of 2021), which severely weakened household confidence. The absence of tourists has also had an impact on activity in the services sector for two years.
Multiple obstacles in 2022
The pandemic curve deteriorated again in spring 2022. The number of new Covid-19 cases skyrocketed in April and May, peaking at more than 80,000 cases per day in the last week of May (for a total population of 24 million). This wave, linked to the Omicron variant, partly resulted from the gradual abandonment of the zero-Covid strategy that had been followed by the authorities. This has been permitted by the improvement in the population’s vaccine coverage (from 68% at the end of 2021 to 82% at the beginning of July, with 73% having also received a booster). Despite this change in strategy, mobility indicators fell in April-May, which weighed on activity, and retail sales in particular. Mobility indicators have improved gradually since the beginning of June, and private consumption should strengthen over the summer.
However, other obstacles are hampering economic growth, which is projected at 3.5% in 2022 as a whole. Real GDP growth slowed in Q1 2022 (+1.1% q/q compared to 2.4% q/q in Q4 2021) and could be negative in Q2 (q/q). It would only recover moderately in the second half of the year, against a backdrop of slowing global demand, rising inflation pressures and monetary tightening. Fiscal policy should, however, continue to support activity.
Taiwanese industry and exports were directly affected by the consequences of lockdowns in Shanghai and other Chinese industrial regions. Disruptions in goods transportation and value chains and the contraction in Chinese demand led to a slowdown in manufacturing production (+5.1% y/y in May 2022 compared to 9.2% in December 2021) and exports (+12.5% y/y in May compared to 23.3% in December). China accounts for around 30% of Taiwan’s exports (and Hong Kong another 14%) and 22% of its imports.
Industry supply problems have started to ease with the (partial) lifting of mobility restrictions in China, but the Taiwanese export sector will remain held back in the short term by weakening global demand. The manufacturing PMI fell below 50 in June 2022 (to 49.8), for the first time since June 2020. In particular, it was affected by the drop (to 47.9) in the "new export orders” sub-component.
Indeed, given its high degree of trade openness and dependence on exports, the Taiwanese economy is exposed to the indirect repercussions of the war in Ukraine and its effects on global trade, value chains and commodity prices. The direct consequences of the conflict are very small, since the island’s trade with Russia and Ukraine is extremely limited.
Finally, Taiwan has faced significant capital outflows since the beginning of the year: in addition to the withdrawal of portfolio investments felt by a majority of emerging markets, it has suffered from renewed concerns about tensions prevailing in the Taiwan Strait. The impact on financial variables has been significant (the Taiwanese dollar depreciated by more than 7% against the US dollar during H1 2022, and the main index of the Taipei stock exchange fell by almost 20%), but Taiwan’s external liquidity position has remained intact and extremely robust.
Monetary tightening in progress
Consumer price inflation (CPI) has been rising for several months (+3.4% year-on-year in May 2022 compared to 2.6% in December 2021), mainly driven by the rise in food prices – which make up 24.8% of the CPI index and increased by 7.4% y/y in May (compared to 4.2% in December). Core inflation is barely accelerating (+1.7% y/y in May compared to 1.6% in December) and CPI inflation is not excessive. It is, however, at its highest level since 2008, and inflation expectations continue to deteriorate.
TAIWAN: ECONOMIC GROWTH SUPPORTED BY EXPORTS AND INVESTMENT As a result, and like many other central banks, the Taiwanese monetary authorities have begun a tightening cycle. The main key rate, which had been kept at a historic low of 1.125% since the Covid-19 shock at the beginning of 2020, was raised to 1.375% in March and to 1.5% in June. Further hikes are expected from monetary policy committees over the next two quarters.
Lending rates have also increased as a result (chart 2), and growth in bank credit should slow in the short term. Growth in bank credit to the private sector has gradually strengthened since 2016, including over the last two years (growth in real terms reached 5.9% y/y in April-May 2022 compared to 3.9% in 2019). Bank credit to the private sector represented almost 160% of GDP in 2021, a relatively high level, and was distributed evenly between corporates and households.
