Taiwan: Growth forecast lowered further; one rate cut becomes likely

The 2H15 growth outlook now looks weaker than expected. Export orders remained flat in Jul15 and manufacturing PMI dipped further below 50 in Aug15. Headwinds will remain in the near term, given China's economic slowdown, excessive production capacity and competitions in the electronics sector. 

Domestic demand, on the other hand, is also losing steam due to falling equity and property prices. There is the risk that domestic demand will slow further as the labor market may soften as a result of an extended period of exports weakness. As such, DBS Bank says that they have further cut the 2015 growth estimate to 1.4% from 1.8%, the third downgrade over three months. The 2016 forecast is also lowered to 2.9% from 3.5%.

Inflation estimate is trimmed to -0.4% (from -0.2%) for 2015, mainly reflecting the sluggish oil prices. Considering a low comparison base, inflation is expected to rise to 1.2% next year  The sharp fall in GDP growth to the 6-year low will exert pressures on the authorities to stimulate the economy and support sentiment, at a sensitive time ahead of the 2016 presidential and parliamentary elections. The room of using fiscal policy is constrained due to the legal ceilings imposed on public debt. As such, the central bank may have to shoulder the burden of supporting the economy. Over the past one month, the central bank has already guided down the interbank rates by allowing more CDs to mature. It has also relaxed mortgage lending rules to aid the property market.

"We now expect the central bank to cut the benchmark rate by 12.5bps when reviewing policy at the end of this month, before leaving it at 1.75% in the rest of this year and through 2016," added DBS Bank research.