A technical recession unavoidable for Taiwan

Based on the revised GDP data out last Friday, the economy didn't escape from a technical recession. Growth stayed in the negative territory for two straight quarters, registering -4.5% (QoQ saar) in 2Q and -1.2% in 3Q. Falling demand from China and other emerging markets has seriously hurt Taiwan's exports and the impact was more lasting than expected. 

The short-term growth cycle has bottomed in 3Q. GDP growth is expected to turn positive on the QoQ basis in 4Q, rising a circa 3% (saar). On the YoY basis, growth is expected to stay around 0% in 4Q after falling -0.6% in 3Q. The key driver will come from a rise in electronics demand from the developed markets, thanks to the arrival of peak season in this sector. Export orders have bounced back notably in Oct. Industrial production has also picked up, albeit disproportionately. 

That said, growth rebound will likely be mild and the sustainability of recovery remains a question. China's slowdown and the Fed's tightening will continue to pose uncertainties for the external demand outlook over the next one year. Structural problems will also constrain the longer-term growth performance, such as the continued process of industrial hollowing-out and the increase in trade competitions from China as a result of its maturation of supply chains. 

"We maintain the forecast that the economy will grow only modestly by 2.4% next year, significantly below the long-term trend rate of 4%", says DBS Group Research.