Recession is unlikely in Taiwan

The preliminary GDP estimate for 3Q15 is in focus this week. The year-onyear growth is expected to register -0.3%, a further decline from 0.5% in 2Q15 and the first negative reading seen over six years since 3Q09. If confirmed, this would fuel market talk about a recession. 

Recession is unlikely. On the QoQ (saar) basis, it is estimated that GDP growth has risen to 1.5% in the Jul-Sep period from -6.6% in Apr-Jun, which means two straight quarters of contraction could be marginally avoided. Growth is expected to stay in the positive territory in 4Q, in both QoQ and YoY terms. 

The fall in exports was the main drag during the past two quarters. But the situation is likely to improve in 4Q. Export orders have showed a strong rebound in Sep (8.8% MoM sa), driven by rising demand for information & communication products and electronics components. This suggests that the seasonal effects in the electronics sector will kick in soon, which will boost exports and manufacturing activities in the months ahead. 

Meanwhile, the softening of domestic demand should be a temporary phenomenon. Due to heightened volatility in global financial markets in 3Q, equity prices fell in Taiwan and consumer confidence deteriorated. But sentiment has started to improve more recently as Fed rate hikes were delayed and other major central banks pledged to keep monetary policy accommodative. In addition, Taiwan's central bank has cut rates and eased the mortgage lending rules since Aug. This is expected to support domestic demand through the credit channels in the coming quarters. 

"In a nutshell, we think economic recession remains unlikely despite one quarter of negative GDP figures. We will review our 2015-16 GDP forecasts after the release of 3Q data this week", says DBS Group Research.