IHS Global Insight Perspective | |
Significance | GDP in real terms rose by a staggering 9.2% on the year in the three months through December, reversing a revised 0.98% fall in the previous quarter. In seasonally adjusted terms, the economy grew at an 18% annualised rate, accelerating from the 10.2% expansion in the previous quarter. |
Implications | The rebound in the fourth quarter was broad-based. While exports remained the primary driver of growth that was boosted by a solid revival in China-led Asian demand, abundant liquidity also supported a strong rebound in domestic demand. |
Outlook | The startling fourth-quarter results indicate that the export-led recovery will continue in 2010. However, much of the pick-up in growth was due to the favourable base effect, which, in turn, suggests a gradual deceleration in growth during the course of 2010 as the base-effect fades out. IHS Global Insight expects the economy to grow 4.9% for the whole 2010. |
Taiwan's economy pulled out of the worst recession during the final quarter of 2009, as China-led regional rebounds prompted a sharp revival in exports, while the wealth effect resulted from higher asset prices boosting domestic demand. Data released yesterday by the Directorate General of Budget, Accounting and Statistics showed that GDP in real terms rose 9.2% year-on-year (y/y) in the three months through December, reversing the revised 0.98% contraction in the September quarter. This marked the strongest expansion since the second quarter of 2004 and followed five straight quarters of decline. The rate of gain was higher than the 6.3% increase from advanced consensus forecasts. In seasonally adjusted terms, the economy rose 18% quarter-on-quarter (q/q, annualised rate), following the 10.2% expansion in the previous quarter and representing the third consecutive quarter of double-digit growth. However, despite the strong fourth-quarter result, the economy still registered a 1.9% fall for the full year of 2009, the sharpest contraction on record.
Sharp Export Growth Driven by China-Led Demand
Exports recorded a sharp turnaround in the three months through December, fuelled by strengthening China-led regional trade flows as well as surprisingly strong tourism growth. Exports of goods and services surged 19.1% y/y in the December quarter, marking the biggest expansion since the second quarter of 2004. It also sharply reversed an 8.4% decline in the September quarter. In q/q annualised terms, total exports advanced 26.7% after rising by an already strong 35.6% in the previous quarter. Warmer relations with China have helped to lift business activities across the two sides, while boosted by a 170% surge in Chinese tourist arrivals and a 22.2% increased tourism revenue. The island also benefited from strengthening Chinese demand boosted by the Beijing authorities' massive fiscal stimulus. Strong Chinese recovery has also helped spur Asian trade flows and counterbalance still-sluggish demand from Western markets. Concurrently, imports climbed 14.5% y/y in the December quarter, reversing a 12.3% decline in the previous quarter. The rebound in imports reflects recovering domestic demand and higher commodity prices. Net exports contributed 4.7 percentage points to GDP growth in the December quarter.
Unexpectedly Strong Domestic Demand
Domestic demand returned to growth for the first time in seven quarters, prompted by abundant liquidity and the government's stimulus measures. Private consumption rose by a sharp 6.3% y/y in the December quarter, strengthening from the 2.3% increase in the previous quarter. The rate of gain was also the strongest since the second quarter of 2004. Record low interest rates have pumped ample liquidity into the local markets and helped the surge in asset prices. The positive wealth effect, coupled with a reduction in certain commodity taxes including those on automobiles, has prompted a strong rebound in consumer spending. Concurrently, business spending resumed growth in the December quarter, as business sentiment was lifted by rising export orders, abundant liquidity, warming cross-Strait relations, and a low base effect. Nevertheless, uncertainty over a global recovery has kept businesses cautious to some degree. Total gross fixed-capital formation rose 11.1% y/y in the three months through December, reversing a 5.2% fall in the previous quarter. With fiscal stimulus continuing to come on-stream, the gain was led by a 23% expansion in investment by public enterprises and a 14% increase in government investment. Concurrently, private investment rose for the first time since the first quarter of 2008, by 8.2%, after falling 12% in the third quarter.
Outlook and Implications
The fourth-quarter figures saw a sharp turnaround in the island's economy and were stronger than expected. Being one of the worst-hit economies by the global economic crisis, the sharp rebound in fourth-quarter growth was primarily owing to the low comparison base a year earlier. With the same factors carrying into 2010, a strong performance is likely to be repeated in the first quarter, and growth will gradually moderate through the final quarter as the base effect fades out. Concurrently, the economy's recent performance is clear evidence of the island's heavy reliance on external demand, in particular of the fast-growing importance of the Chinese market. With the continued revival in world trade, especially the strengthening China-led regional trade flows, exports will remain the main driver of growth and boost a further recovery in the economy. Nevertheless, the pace of recovery is contingent on the world recovery, and uncertainty over short-term prospects remains, as the still-high jobless rate and the ongoing debt crisis in some European nations continues to threaten the world economic outlook. In addition, with worldwide concerns over asset bubbles and debt loads increasing, the earlier-than-expected exit from monetary and fiscal stimulus could derail the world recovery. On balance, IHS Global Insight currently projects the economy to expand by 4.9% for 2010.