Economy & Business
Taiwan's 2024 economic outlook
While Taiwan’s overall economic and financial environment remains stable, as an export-driven economy, Taiwan’s growth prospects in 2024 will depend largely on demand from its major export markets.
By Paul Shelton
Economic outlooks are always subject to various factors that can impact growth, stability, and overall performance, which make them challenging in any case, while Taiwan has a few unique factors of its own.
While predicting the future is inherently uncertain in any economy, Taiwan, at the start of 2024, faces not only an important presidential election but also attempts by external forces to materially affect both the results of the election and the performance of the economy.
Taiwan emerged out of a technical recession in the second quarter of 2023. Gross Domestic Product (GDP) grew by 1.41% year-on-year after two successive quarters of GDP contraction and by 2.32% in the third quarter of 2023 (2Q23), based on preliminary estimates by the Directorate General of Budget Accounting and Statistics (DGBAS). Analysts attributed the rebound to an increase in private consumption, which grew by 12.1% year-on-year in 2Q23, 9.23% in 3Q23, and is forecast by the DGBAS to rise by over 8% for the full year in 2023.
However, Taiwan’s export sector has continued to be hit by slumping exports. Exports fell by 6.6% year-on-year in the second quarter of 2023 and yet at the same time the net impact on the GDP was mitigated by a sharp decline in imports, which fell by 7.7% year-on-year. Cumulative exports in the first three quarters of 2023 were US$316.98 billion, 13.8% below the same period in 2022.
A key factor driving the export slowdown has been weak demand for Taiwan's electronics exports in key global markets, notably the US, EU and mainland China despite the global expansion efforts of global giants such as TSMC.
Fortunately, Taiwan's economy then rebounded in the second quarter of 2023. Consequently, Taiwan's technical recession that ran from the fourth quarter of 2022 until the first quarter of 2023 ended in the second quarter of 2023, primarily due, as noted above, to the strength of private consumption spending growth.
It has been a bit up and down for Taiwan over the last few years. Taiwan's growth slowdown in 2023, followed a period of strong economic expansion in 2021 and 2022. In 2021, annual GDP rose by 6.5% year-on-year. This was the fastest pace of annual economic growth since 2010, boosted by export growth of 29% year-on-year, with exports of semiconductors up by 27% year-on-year.
In mid-October 2023, the National Development Council (NDC), the policy-planning agency of Taiwan’s Executive Yuan, predicted that Taiwan's GDP would grow by approximately 1.5% in 2023 amid improvements for the export-oriented manufacturing sector. In its latest GDP estimate from 28 November, the DGBAS forecasts GDP growth of 1.41% in 2023 and 3.35% in 2024.
The NDC’s anticipated economic recovery was expected to start from growing demand from end-users. The information technology industry, which depends heavily on end-users, has shown signs of reviving with inventories gradually falling to a healthy level so that the upstream industries such as component electronics makers will catch up later.
Old economy industries, such as steel, agriculture, and manufacturing are expected to follow suit as well to push up exports further.
Fortunately, the domestic demand-oriented service sector has stayed resilient on the back of robust consumption in the post-Covid-19 era, continuing to lend support to the local economy.
But the NDC's outlook was in sharp contrast to that of the International Monetary Fund (IMF), which downgraded Taiwan's 2023 GDP growth forecast by 1.3 percentage points to only 0.8% in its forecast made in October 2023. However, commentators have noted that the IMF has a record of underestimating Taiwan's economic growth.
The NDC’s prediction was based on Taiwan's exports ending their losing streak in the fourth quarter of 2023, boosting full year GDP to around 1.5%.
But onwards to 2024. As 2023 came to an end Taiwan’s Institute of Economic Research (TIER) was predicting that Taiwan’s economy could grow more than 3% in 2024. The 3% figure was based on a belief that exports would drive growth in the manufacturing sector, as performance in the construction and services sectors recovers.
This 3% prediction was also said to be achievable despite China’s recent removal of tariff relief on 12 Taiwanese petrochemical imports covered by the Economic Cooperation Framework Agreement (ECFA). The ECFA is a free trade agreement between the governments of the People's Republic of China and Taiwan, that aims to reduce tariffs and commercial barriers between the two sides, as well as improve cross-strait relations.
Whilst some observers have voiced concern that the move could deal a blow to Taiwan’s industry, there is also many analysts who believe that it is merely an effort by China to put political pressure on Taiwan and that it would only have a limited effect on Taiwan industry. As evidence of this, TIER noted that the 12 kinds of products affected account for a very small share of Taiwan’s exports, so the impact will be rather small. For now it may be the petrochemical industry, but next time it could be machinery or other products.
Whilst TIER maintains its expectations that Taiwan’s GDP growth rate will exceed 3%, on the back of improving performance in the manufacturing, service and construction industries, ultimately the speed of improvement depends on international demand.
The global economic downturn has affected Taiwan. Exports are an important driver of Taiwan’s economy and sluggish global trade and subdued growth in China could constrain Taiwan’s upside growth potential, particularly for the commodity sectors.
However, a rebound in consumer demand for electronics and rising demand for electric vehicles, renewable energy and artificial intelligence could also support Taiwan’s export growth in 2024.
Domestic consumption is likely to be modest in 2024, given the high base growth in 2023 once the impact of the Covid-19 pandemic has subsided.
In addition, corporate investment is expected to remain slow amid the gloomy global economic outlook. Global macroeconomic obstacles include uncertainties around restructuring of global supply chains, the high interest rate environment, and geopolitical tensions. These obstacles could weigh on corporate capital expenditure plans over the next few quarters. Some commentators believe the US and Europe still risk a hard landing, further depressing aggregate demand and exports.
Intensification of geopolitical tensions could also hit business confidence, worsening trade and investment conditions. In Taiwan’s case, this is normally associated with China, but, as an export driven economy, any geopolitical conflict will no doubt impact Taiwan. There appears to be no sign of the Ukraine-Russia or Middle East conflicts coming to a quick end anytime soon.
Taiwan’s economy is also closely linked to climate change and the increasing need for energy. Whilst the NDC’s 2050 Net-Zero Pathway sets out clear plans for Taiwan’s transition to clean energy, in the meantime, extreme weather and the energy transition itself could threaten supply and costs.
Mounting cyber-attacks, to which Taiwan seems particularly targeted and vulnerable, have the very real prospect of disrupting business operations, impacting production and if large enough, having a negative impact on economic growth in 2024.
There is a wide variety of factors that could impact the potential of achieving the anticipated 3% growth. Some are within Taiwan’s control and some not.
These factors include the following:
- With respect to the US and Europe, the lagged effects of rapid rate hikes by the Fed and the European Central Bank have slowed global economic growth.
- More conservative household consumption and corporate investment activity could exacerbate the demand slowdown from Western economies. For Taiwan, tepid global trade will hit exports and manufacturing activities.
- At the same time, slower growth in China could sour business and household propensity to consume. Persistent weakness in the China’s real estate sector, tepid household and business confidence, high debt, and subdued exports are curbing China's economic growth momentum. This could lead to contagion risk which could lead to Taiwan experience a spillover effect which could be more significant due to its close economic ties with China.
- While inflation risks have eased, rising food and fuel prices could lead to higher core inflation. Taiwan's net energy-importing status underlines its susceptibility to high fuel prices (despite COP28’s acceptance of continued use of fossil fuels). Should the Middle East conflict intensify and widen, an energy supply shock could spur inflation and weigh on economic activity.
- Weakness in the new Taiwan dollar (NT$) could lead to higher imported inflation. While financing access appears stabilized, lower-rated issuers remain susceptible to higher borrowing costs and liquidity squeezes.
- A deepening or widening of political tensions and conflicts, particularly US-China geopolitical friction, could spill over into regional trade and investment flows.
- A further reduction in supply chain reliance on China by Western and other importers could push up near-to-medium costs, adding to inflation pressures. A widening of investment and export restrictions by the US on China in respect of high-end semiconductors, quantum technology and artificial intelligence, and the Chinese response of curbing raw mineral exports would affect supply chains.
- Technological advances, such as in artificial intelligence, could alter business landscapes, rendering technology laggards obsolete. While technology developments (beyond just information technology) could positively enhance productivity, operational efficiencies, and competitive positioning, such advances could also create complexity in management, maintenance costs, and added regulation. Businesses may need to incur additional ongoing and rising costs to continually adopt and adapt to new technologies.
What Taiwan in 2024 does not need are:
- A new global pandemic. Another widespread health crisis could further disrupt global supply chains, reduce consumer spending, and lead to economic contraction.
- Natural disasters. The recent intense earthquake on Japan’s west coast is a timely reminder of Taiwan’s own geographic location on global fault lines. This risk and the increasing frequency and intensity of natural disasters due to climate change could cause additional disruptions to supply chains, damage infrastructure, and lead to economic losses.
However, we should also look for positive news that will help sustain the potential of 3% GDP growth.
Taiwan’s oft-maligned banking sector should be seen as a source of positivity with stable credit trends and solid capitalization providing a rating buffer. Banks could see slightly higher loan growth in 2024 versus 2023 amid better domestic GDP growth prospects. We should also expect fee income will recover slightly following a warming of the wealth management business (and the potential growth of family companies). Credit costs should remain flat amid stable economic conditions domestically and a prudent overseas growth pattern.
No doubt due to the vigilance of the Financial Supervisory Commission, Taiwanese banks are known for their adequate-to-strong capitalization, and this should provide a sufficient buffer for business growth and unexpected volatility. Taiwan’s also boasts a high retail deposit base and this in turn should support the bank sector’s funding resilience.
Similarly, the securities sector, with its strong capitalization should continue to support potential business growth and an increase in investment portfolios over the next few quarters of 2024.
More stringent underwriting in the financing and leasing sectors should also halt deteriorating asset quality in the first half of 2024.
The insurance sector is also incredibly important to Taiwan’s economic performance, arguably even more than the banking sector. Whilst the insurance sector suffered during the Covid-19 pandemic, larger insurers saw a rebound in monthly renewal premiums in late 2023. Premiums should increase moderately in 2024 with less volatility, amid insurers’ efforts to sell protection-type policies with longer premium tenors.
The insurance sector’s capital strength should remain strong relative to its risks. Catastrophe risk remains well-covered by adequate reinsurance treaties. Profitability is likely to remain relatively unchanged in 2024 but is anticipated to the remain stable.
As noted at the start of this article, economic outlooks are subject to various factors that can impact growth, stability, and overall performance and predicting the future is inherently uncertain. Success in 2024 will require Taiwan’s policymakers, businesses, and individuals to remain vigilant, adaptable, and proactive in navigating the dynamic domestic and international economic landscapes.
Paul Shelton is a consultant with 30 years of experience in the international financial services and related industries with skills in all aspects of legal and financial crime compliance and regulatory relationship advisory and management.