Taiwan Dips Into Recession with Export Shortfall

The Lede: Taiwan’s economy has slipped into a recession following the release of GDP data for the first quarter.

What We Know:

• Taiwan’s Directorate General of Budget, Accounting, and Statistics—the highest authority in charge of the budget—estimated that its economy shrank by 3.02% from January through March of 2023, year on year, and by 6.37% compared to the three months prior at the end of 2022.
• The result for the first quarter was worse than the initial forecast of a 1.20% contraction. It marks a 14-year Q1 low for Taiwan.
• A highly export-dependent economy, Taiwan's exports of goods and services contracted by 10.86% from pressure on the global demand for consumer electronics, inventory and supply chain adjustments, and trouble in world markets due to inflation and interest rate hikes.
• Domestically, private consumption grew by 6.6% in Q1 with the return of travel, shopping, and dining after the post-pandemic reopening.
• In contrast, China’s economy grew by 4.5% in Q1.

The Background: Taiwan has been reopened for international travel and business after the COVID-19 pandemic since October 2022. Previously, it had required a mandatory quarantine period and testing for foreign visitors as well as Taiwanese residents. Face masks are no longer mandatory on public transportation. Mainland China has been reopened since the end of 2022. Taiwan is an important part of the international technology supply chain for multinational companies, many of which source from mainland China.

Likely Outcomes:

• China’s reopening has disappointed global markets. The highly anticipated economic splash has not yet materialized. Though some still hope for the effects of reopening to trickle through the year, markets have reflected some skepticism in the short term. The muted optimism regarding China’s return to the global economy could mean Taiwan’s economic pain will persist into later quarters of the year.
• Geopolitical friction between the U.S. and China, particularly over Taiwan and the broader semiconductor market, will likely push further economic decline as long as tensions persist. Pressure on the Chinese economy would put further pressure on the Taiwanese economy as it is disproportionately dependent on trade with the Mainland.
• A weakened Taiwanese economy could affect the presidential election cycle that culminates in January 2024. The incumbent Democratic Progressive Party (DPP) may face stiff criticism for weakening U.S.-China relations. This may provide an opening for the opposition Kuomintang, which lost control of mainland China to the Chinese Communist Party in 1949 and fled to Taiwan, establishing Taipei as the new capital of the Republic of China. The Kuomintang, which favors warmer relations with China, controlled Taiwan under one-party rule until 2000 when the DPP first won power and again from 2008 to 2016 when the current president, Tsai Ing-Wen was elected.

Quotables:

"Weak external demand remains the biggest challenge for Taiwan, with China's reopening having failed to lift demand for Taiwanese goods like chips and other critical intermediate components. The most optimistic forecasts aren't expecting a rebound in Taiwanese export activity until the second half of 2023, but even that could be an optimistic timeline." – Nick Marro, analyst from the Economist Intelligence Unit

“The decline in exports will continue to weigh on Taiwan’s economic growth prospects in the short term. The export outlook will remain challenging.” — Yang Yuting, chief economist for Greater China at ANZ Bank

Good Reads:

Taiwan GDP down 3.02% in Q1 as economy sinks into recession (Nikkei)

Taiwan enters recession on weak worldwide demand for its electronics (South China Morning Post)