Taiwan Is Getting Into Trouble

Taiwan's unemployment rate has edged up for three consecutive months, which is largely because of the slowing manufacturing sector. We think there is little monetary policy and fiscal stimulus can do at this point to support growth.

Source: istock

Taiwan's economy is weakening

Taiwan's industrial production fell, even more, too -1.86% year on year in February from -1.22%YoY in January 2019.

The manufacturing sector, which is highly dependent on smart devices production, is slowing to the extent that it has raised unemployment higher from 3.69% in November to 3.70% in December and now 3.72% in January.

The last time we saw such a high unemployment rate was during the summer holidays in 2018, which was unusually higher due to more job seekers from schools and universities. 

The central bank can't do much to prevent rising unemployment

The slowdown of the manufacturing sector will continue until we see good sales of new smart devices produced by Taiwan and this could take up to a year.

During this year, we expect manufacturing activities to slow down to negative growth and therefore affect the unemployment rate. 

However, the central bank can hardly do much to change this weakening picture. The current policy rate level is 1.375% and lowering it by 12.5 basis point each time would do very little for credit expansion and therefore economic growth.

Little room for fiscal stimulus

Taiwan had a budget balance of -0.11% per GDP in 2017 and we expect this to increase to -0.5% in 2018. The continuous budget deficit, albeit small, makes it difficult for a small open economy like Taiwan to increase fiscal stimulus to support economic growth.

Patience, may be the answer

The economy may need to be patient to wait for the bad times to pass. We believe Taiwan will continue to suffer for most of 2019, but until then, the economy we expect the economy to grow by 1.8% in 2019.