TAIWAN’S ECONOMY: ALIVE IN THE BITTER SEA

The story continues …

Taiwan Business Leaders’ Forum 29 March 2017

The wisdom of Percy Bysshe Shelley

“O, wind, if winter comes, can spring be far behind?”

Percy Bysshe Shelley

One of the major English Romantic poets

XIX century.

Global and regional economy, commentary by IMA Asia

• Donald Trump’s presidency could set the US on a more expansionary path, provided he proves to be a capable president who finds a way to work with the checks and balances of even a GOP-controlled Congress. Into a fully employed market, Trump will inject an extra stimulus centered on a big infrastructure program – including The Wall!

• A strong US economy has always been good for Asia and the benefits of a Trump reflation in the US should outweigh the risks of rising trade barriers. His construction/ consumer boom should please his supporters, allowing him wiggle room in the contradictions between his call for balanced US trade with the rest of the world and a strong US$.

• We will not fully understand the impact of Trump’s presidency for several months (if ever), as much will remain uncertain about the man and his administration. But at a minimum, we may have to lift our current modest export growth forecasts for East Asia over 2017-20.

• East Asia’s export surge to the US 2002-07 is unlikely to recur, but even half of that would be a big step up in the outlook for Asia’s exports.

The World Bank on global trade – it’s been slowing

2016 was the fifth consecutive year of slow trade growth and the year with the weakest performance in trade since the Global Financial Crisis 2008-9.

• Weak trade growth seen in 2016 was characteristic of both high-income and developing economies.

• Preliminary data suggest that world merchandise trade grew by a little more than 1 % in 2016 compared to 2 % in 2015 and 2.7 % in 2014.

• World trade grew at about 3 percent per year from 2012-2016, lower than the pre-crisis average of 7 percent per year for 1994-2008. Productivity growth also declined to 1 percent per year post-crisis from an average of 2 percent during 1994-2008.

• “The trajectory of trade growth in 2016 reflects a number of structural determinants. These include a maturing of global value chains (GVCs) and a slower pace of trade liberalization. Some cyclical factors, notably slow global growth and low commodity prices also contributed. Policy uncertainty may have added to the worsening of trade sluggishness in 2016.”

• “The slower pace of GVC expansion could be diminishing the scope for productivity growth through a more efficient international division of labor and diffusion of technologies.”

The global economy is now enjoying a synchronized upswing

• It looks likely that this year, for the 1st time since 2010, rich-world and developing economies will put on synchronized growth spurts.

• For six months or so there has been growing evidence of increased activity. It has been clearest in the export-oriented economies of Asia, but it is visible in Europe, in America and even, just, in hard-hit emerging markets like Russia and Brazil.

The signals are strongest from the more cyclical parts of the global economy, notably manufacturing. Surveys of purchasing managers in America, the euro zone and Asia show factories getting a lot busier (see chart 1).

Global trading hubs such as Taiwan and South Korea are bustling. Taiwan’s National Development Council publishes a composite indicator that tracks the economy’s strength: blue is sluggish, green is stable and red is overheating. The overall economy has been flashing a green light for seven months and is pushing up towards the red zone – meaning HOT!

These are the main reasons why

This apparent vigor is in part just a reflection of how bad things looked 12 months ago; suppliers who overdid the gloom in early 2016 are restocking.

Business spending on machinery and equipment is picking up.

The good news goes beyond manufacturing, too. American employers, excluding farms, added 235,000 workers to their payrolls in February, well above the recent average.

The European Commission’s economic-sentiment index, based on surveys of service industries, manufacturers, builders and consumers, is as high as it has been since 2011.

After a strong fourth quarter, the Bank of Japan revised up its forecast for growth in the current fiscal year from 1% to 1.4%.

The revival’s roots can be traced to the early months of last year, when a possible calamity was averted. At the end of 2015 stock markets tumbled in response to renewed anxiety about China’s economy.

There were fears that China would be forced to devalue its currency sharply.

By the end of the year producer-price inflation in China—and across Asia—was positive again. And China’s nominal GDP, which had slowed more than real GDP, sped up again.

On March 9th Mario Draghi, boss of the European Central Bank (ECB), declared that the risk of deflation had “largely disappeared”.

John Lovelock, a research analyst at Gartner, says the biggest jump in spending is forecast for the Asia-Pacific region.

What is behind this nascent recovery and will it take hold?

We believe it will

Will this be “continuous as the stars that shine”?

It is not hard to imagine things that might yet derail the recovery.

China’s growing debt pile could still bring markets tumbling down, though there is a cast-iron consensus that nothing bad will be allowed to happen before the big Communist Party congress in the autumn.

Populist victories in Europe’s various elections could bring about a crisis for the euro. Even if they do not, an end to the ECB’s bond-buying program, which has kept government-borrowing costs at tolerable levels and even allowed a bit of fiscal stimulus to lift the economy, will lay bare the euro is still-unfixed structural problems.

Or Mr. Trump might make good on the repeated threats he made in his campaign to raise import tariffs on countries he considers guilty of unfair trade, thus taking a decisive step away from globalization just as the world’s main economic blocs are at last starting to get into sync.

These risks are not new or surprising. What brings freshness to the air is that a cyclical recovery has managed to overcome them. There may actually be some rosebuds to gather, for a while.

Global and regional economy 2017, commentary by IMA Asia

It would be a mistake to attribute this year’s better global growth outlook to reflation hopes tied to Donald Trump becoming POTUS, although that has clearly boosted US stocks and the dollar.

• 2017’s improved outlook is anchored by a lift in global growth that started in mid-2016 and both broadened and accelerated in November. It is strikingly apparent in exports reported for the 14 Asia-Pacific markets that we cover, which swung to 5.3%yoy growth in November after falling 4.7%ytd in the first 10 months.

• It is also apparent in higher commodity prices like gains of 95% for iron ore, 74% for zinc, 44% for tin and 20-30% for copper, lead and nickel.

• Companies also noticed it, with Market‘s global purchasing managers’ index for December at a 13-month high of 53.4 (based on a two-and-a-half-year high for the manufacturing PMI and the services PMI matching November’s 12-month high).

• Two further points worth noting from Market's global survey: job creation accelerated to a 19-month high and cost inflation hit a 63-month record (as might be expected given fast rising metal prices).

China’s economy shows signs of stabilization

• According to the latest IMF World Economic Outlook report released in January, GDP growth forecast has been revised upward to 6.5%, on expectations of continued policy support.

• IMF said that Mainland China’s continued reliance on policy stimulus measures, with rapid expansion of credit and slow progress in addressing corporate debt, and capital outflow pressures, may raise the risk of a sharper slowdown or a disruptive adjustment.

• In addition, US-China trade friction and Mainland China’s leadership reshuffle in 2017, will increase the uncertainties for the economy.

Global GDP growth set to rise in 2017

• According to the IMF’s Economic Outlook released in January 2017, global economic growth is forecast to be 3.4%, higher than 3.1% of 2016. Meanwhile, Global Insight also revised upward its 2017 world growth forecast to 2.9% in February.

• The new US administration has created new uncertainties for the global economy. Global activity could accelerate if President Donald Trump actually introduced fiscal stimulus measures, while his trade policies may spread protectionism around the world, and then curb global economic growth.

IMA Asia on growth rates in the global economy

TAIWAN’S ECONOMIC OUTLOOK

NDC on growth in Taiwan's economy

The economy continues to rebound

• According to the DGBAS’s latest estimate in February 2017, GDP growth rate in 2017 is forecast at 1.92%, 0.05 percentage points higher than the November 2016 forecast, mainly due to expected improvement in exports.

• On a quarterly basis, real GDP is expected to grow at a steady pace in 2017.

Strong increase in Foreign Trade • Total exports increased by 27.7% year-on-year in February 2017, mainly due to

the Chinese New Year effects. Combing the first two months of this year, exports grew 16.2% on average, a faster pace compared to 14.0% in December 2016.

• Imports increased by 42.1% in February over the previous year, while annual change rate of January-February was 22.7%, with crude oil and semiconductor equipment the main contributors to the increase.

• Monitoring indicators are five different lights similar to traffic signals, which indicate the current economic situation.

• Different lights can be used to prompt the government countermeasures to be taken.

• Changes in the monitoring indicators shall also serve as a reference for determining economic ups and downs.

• The current monitoring indicators compiled by the NDC consist of nine components:

How the NDC defines its Monitoring Indicators

• monetary aggregate M1B

• TAIEX average closing price

• industrial production index

• nonagricultural employment

• customs-cleared exports

• the imports of machineries and electrical equipment

• index of producer’s shipment for manufacturing

• sales of trade and food services

• TIER manufacturing sector composite indicator.

Monitoring Indicators Showing a Green Signal

• In January 2017, the trend-adjusted leading index increased by 0.37% to 101.76, and the trend-adjusted coincident index was up by 0.93% to 105.40.

• The total score of the monitoring indicators in January 2017 increased by one point to 29, flashing the “Green” signal for the seventh month.

• Taiwan Business Indicators showed that the domestic economy continues its recovery.

DGBAS : real GDP is projected to grow by 1.92% this year…

• Global economy and world trade volume are expected to expand at a faster rate in 2017. Emerging demand for new smart applications, such as IOT, high-performance computing and automotive electronics, will help maintain the growth momentum of Taiwan's goods exports. Coupled with services exports, real exports of goods and services will grow by 4.01%.

• Private fixed capital formation will grow by 1.85%, supported by continuing investment in semiconductors and government strategies to improve the investment environment and to encourage innovative industries.

• Private consumption will grow moderately by 1.75%. The improved Taiwan's economy and the continuance of government's tax reduction policy are beneficial to the expansion of consumption expenditures; however, the higher inflation rate may hurt people's purchasing power.

Domestic investment expected to increase mildly

• Government is planning to expand investment for forward-looking infrastructure and continuing to accelerate budget implementation.

• Government fixed investment and public enterprise fixed investment are expected to rise by 1.21% and 2.42% in 2017 respectively.

Inflation to remain stable

• With the continuing rise in energy and other raw material prices, WPI is expected to increase by 1.53% in 2017.

• On the CPI side, food prices are expected to gradually come down, as supply of fruit and vegetable returns to normal. However, fuels and lubricants prices are forecast to turn up due to rising international oil prices. Meanwhile, the implementation of new labor regulations at the beginning this year, including weekly days off, overtime payment and annual leave, may lead to rises in the prices of service and food away from home. The CPI is forecast to increase by 1.08% this year.

JANUARY 2017 : TAIWAN’S PMI AND NMI

NDC comment on January’s PMI and NMI

PMI

• The manufacturing sector expanded for twelve consecutive months as the Taiwan Manufacturing PMI rose by 2.4 percentage points to 55.8 percent in February.

• The increase in new orders is the main reason to the higher PMI reading.

NMI

• It reversed its recent trend of growth and turned to contracting during February as the Taiwan NMI dropped 5.6 percentage points to 48.5 percent.

Manufacturing PMI – a good start to the year

Manufacturing PMI industry by industry

What the NDC says about the Manufacturing PMI…

• The manufacturing sector expanded for twelve consecutive months as the Taiwan Manufacturing PMI rose by 2.4 percentage points to 55.8 percent in February. The increase in new orders is the main reason to the higher PMI reading.

• The New Orders index registered 6.8 percentage points higher than the 51.4 percent in February. The significant growth in the New Orders Index was driven by the favorable outcome in Electronics and Optical manufacturers’ new orders.

• The holiday break for the Chinese New Year and the Peace Memorial Day slowed the nation’s manufacturing activities slightly as the Production Indexes dropped only 0.4 percentage points to 49.9 percent in February.

• The Employment Index remained in growth territory for the tenth consecutive month and rose 3.0 percent points to 55.8 percent in February.

• The Supplier Deliveries Index remained above 60.0 percent for two consecutive months and registered 60.4 percent.

• The Inventories Index rose 2.7 percentage points to 54.8 percent and registered its highest reading since May 2015.

• The Prices Index accelerated for the fifth consecutive month and registered 76.4 percent in February. This is also the highest reading reported by the index since July 2012.

• The Backlog of Orders Index registered 54.7 percent and indicates a growth trend for seven consecutive months.

• The Export Index rose 4.1 percentage points to 58.7 percent and registered its highest reading since April 2015.

• The Six-month Outlook Index is up 2.9 percentage points to 64.4% and registered its highest reading since August 2014.

• Of the six manufacturing industries categories, four are reporting growth in February in the following order: Transportation Equipment (63.6%); Electrical & Machinery Equipment (61.7%); Electronics & Optical (57.6%) and Chemical, Biological & Medical (56.3%). While Foods & Textiles (47.1%) turns from growing to contracting in February. Only Basic Materials (50.0%) reported unchanged from January

Industry categories in Taiwan’s Manufacturing PMI

We re-categorize the manufacturing subsectors listed in the Standard Industrial Classification System of the Republic of China (Rev.9, 2011) into six broad categories :

Chemical, Biological & Medical industry (C&M) which includes Manufacture of Chemical Material, Manufacture of Chemical Products, Manufacture of Pharmaceuticals and Medicinal Chemical Products and Manufacture of Medical Instruments and Supplies.

Electronic & Optical industry (Elec) which comprises Manufacture of Electronic Parts and Components and Manufacture of Computers, Electronic and Optical Products

Foods & Textiles industry (F&T) which comprises Manufacture of Food Products, Manufacture of

Beverages, Manufacture of Tobacco Products, Manufacture of Textiles, Manufacture of Wearing Apparel and Clothing Accessories, Manufacture of Leather, Fur and Related Products.

Basic Materials industry (Mt’ls) which includes Manufacture of Wood and of Products of Wood and Bamboo, Manufacture of Pulp, Paper and Paperboard, Printing and Service Activities Related to Printing, Manufacture of Rubber Products, Manufacture of Plastics Products, Manufacture of Other Non-metallic Mineral Products, Manufacture of Basic Metals and Manufacture of Fabricated Metal Products.

Transportation Equipment industry (Trans) which comprises Manufacture of Motor Vehicles and Parts and Manufacture of Other Transport Equipment and Parts.

Electrical & Machinery Equipment industry (Mach) which includes Manufacture of Electrical Equipment

and Manufacture of Machinery and Equipment.

NDC : Taiwan’s NMI then and now – losing ground

The NMI industry by industry…

What the NDC says in full about November’s NMI…

• The non-manufacturing sector reversed its recent trend of growth and turned to contracting during February as the Taiwan NMI dropped 5.6 percentage points to 48.5 percent.

• Both Business Activity and New Orders Indexes failed to grow in February and fell 9.5 and 4.1 percentage points to 44.8 and 47.4 percent respectively. Non-manufacturers’ employment contracted following four months of growth as the Employment Index decreased 6.5 percentage points to 48.9 percent in February.

• The Supplier Deliveries Index reflected slower deliveries for thirty-one consecutive months but registered 2.5 percentage points lower than the 55.4 percent in January.

• The Inventories Index registered 49.8 percent, indicating contraction in inventories following two months of growth.

• Non-manufacturers are experiencing higher prices of their purchases for fourteen consecutive months while the Price Index dropped 3.7 percentage points to 62.0 percent.

• The Backlog of Orders Index registered 42.7 percent and indicates contraction for twenty-three consecutive months.

• The Service Charge Index quite decreased by 5.0 percentage points to 48.3 percent in February, signaling that non- manufacturers priced lower service fees following only one month of relatively higher service prices.

• The Six-month Outlook Index registered 5.9 percent points higher than the 45.6 percent in January, indicating promising growth for the first time since June 2015.

• Of the eight non-manufacturing industries categories, three are reporting growth in the following order: Ed/Pro/ST (57.5%); Fin & Ins (56.5%) and WS (51.1%). While Acc & Food (22.7%); Ret (39.0%); Trans & Stor (42.0%); Inf/Com/BC (48.0%) and Con & RE (49.6%) reported contraction in February.

Industry categories in the Taiwan NMI

We re-categorize the non-manufacturing subsectors listed in the Standard Industrial Classification System of the Republic of China (Rev.9, 2011) into nine broad categories.

• Accommodation & Food Service industry (Acc & Food) which includes Accommodation and Food and Beverage Service Activities;

• Construction and Real Estate industry(Con &RE) which comprises Construction of Buildings, Civil Engineering, Specialized Construction Activities, Real Estate Development Activities, Real Estate Operation Activities and Related Activities;

• Education, Professional, Scientific &Technical Activities (Ed/Pro/ST) which includes Education, Legal and Accounting Activities, Activities of Head Offices and Management Consultancy Activities, Architecture and Engineering Activities, Technical Testing and Analysis, Scientific Research and Development, Advertising and Market Research, Specialized Design Activities and Veterinary Activities and Other Professional, Scientific and Technical Activities;

• Financial & Insurance Industry (Fin& Ins) which comprises Financial Intermediation, Insurance, Securities, Futures and Other Financing;

• Information, Communication and Broadcasting industry (Inf/Com/BC) which comprises Publishing Activities, Motion Picture, Video and Television Programme Production, Sound Recording and Music Publishing Activities, Programming and Broadcasting Activities, Telecommunications, Computer Systems Design Services and Information Service Activities;

• Transportation and Storage(Trans & Stor) which includes Land Transportation, Water Transportation, Air Transport, Support Activities for Transportation, Warehousing and Storage and Postal and Courier Activities; Other Industries (Others): Electricity and Gas Supply, Water Supply and Remediation Activities, Human Health and Social Work Activities and Support Service Activities;

• Wholesale Trade industry (WS) and Retail Trade industry(Ret).These industries together account for an estimated 82% of Taiwan nonmanufacturing sector output.

Conclusion 1/3…

• According to IMF World Economic Outlook report released in January, 2017 global economic growth rate was projected to improve from 3.1% in 2016 to 3.4% in 2017 on the back of growth in both emerging and developed economies.

• However, economic and trade policies of the new US administration, together with the rise of the EU anti-establishment movement, and the aftermath of a “hard Brexit” from the European Union, may affect Taiwan’s economy.

Conclusion 2/3…

• On the domestic economy side, the overall monitoring indicator flashed the "Green" signal for the seventh consecutive month in January 2017, reflecting the domestic economy continuing its recovery.

• According to the DGBAS’s latest estimate in February 2017, Taiwan’s 2017 GDP growth rate forecast has been revised upward, to 1.92%, mainly due to expected improvement in exports outlook.

Conclusion 3/3.

• In order to create an environment conducive to industrial upgrading, the government will actively implement the 5+2 industrial innovation program, which is based on Taiwan’s advantages in the semiconductor industry.

• Meanwhile, the government is planning to expand public investment this year to promote forward-looking infrastructure, including :

• rail transport • water environment • green energy • digital communication • local urban and rural development.

These measures should help transform the industrial structure and accelerate Taiwan’s economic recovery.

THANK YOU 謝謝