• Taiwan may lift COVID-19 restrictions on June 7. But the deterioration in the labour market and the re-escalating China-US tensions cloud the 2H outlook
• Implication for our forecasts: We maintain GDP forecasts at -1.0% for 2020 and 2.9% for 2021
• Implication for investors: The central bank is likely to cut rates further at the June meeting, in the context of a negative output gap and deflation risks
The good, the bad and the ugly
Hit by the COVID-19 pandemic, GDP growth in Taiwan has slowed to 1.6% YoY in 1Q, notably lower than the 3.3% in the final quarter of 2019. On the QoQ (saar) basis, growth turned negative in 1Q, falling -3.6%.
A closer look shows that the fallout of COVID-19 varies across sectors. The electronics sector has remained surprisingly steady and strong. Electronics exports and export orders have maintained double-digit expansion as of April, including the segments of both electronics components and information & communication products. Export prices of electronics products have continued to recover, rising to 0.9% YoY in April from -1.4% in January.
The “stay-at-home” phenomenon may have boosted global demand for devices like laptops, tablets, and game consoles. And the expansion in digital infrastructures, as a result of remote work and distance learning, may have spurred demand for chips, severs and other components.
In contrast, non-electronics manufacturing has deteriorated sharply. Exports of chemicals, plastics & rubber, textiles, footwear, base metals, machinery, and transport equipment fell across the board by 10-30% YoY in April. Industrial output of rubber, textiles, clothing, metal products, machinery, motor vehicles, and furniture also contracted by 10-30% in April.
Retail trade and food & beverage services have also been badly hit by COVID-19. Retail trade and F&B contracted -8.7% and -23.6% YoY respectively in April, a further decline compared to -3.2% and -21.6% in March. According to the Google Mobility Report, retail and recreation activities remained weak during the first 25 days of May, at about 89% of the normal levels (vs 87% in April).
Aviation, hotel and tourism sectors appear to be worst hit by COVID-19. The number of aircraft movement plunged as much as -60.7% YoY in April, a deeper decline compared to - 51.3% in March. The room occupancy rate of tourist hotels dropped to an all-time low of 18%, worse than the 22% seen during the SARS period in May 2003. These are in line with the slump in foreign tourist arrivals (-99.8% YoY in April vs -92.8% in March), reflecting the closure of borders and banning of international travels.
COVID-19 restrictions may be lifted in June
The good news is that Taiwan may lift COVID-19 restrictions starting from this month. There have been no new local COVID-19 cases for 50 consecutive days as of June 1, equivalent to nearly four complete incubation periods. The Central Epidemic Command Center (CECC) has said that if local cases remain at zero till June 7, many restrictions could be lifted.
Note that there was no lockdown in Taiwan during the COVID-19 outbreak, i.e., workplace closure, stay-at-home requirement, and domestic travel restrictions. The lifting of COVID-19 restrictions mainly refers to those on public gatherings and events. According to the CECC, the existing limit on the number of people gathering in one place would be removed from June 7 onwards. But people would still need to adopt precautionary measures, such as wearing masks or keeping a safe distance, and providing names and contact details during gatherings.
Meanwhile, the strict restrictions on international travels will remain in place, until the pandemic situation in other countries eases substantially. According to the Ministry of Transportation and Communications, Taiwan would only start to open international travels during the final stage of a three-stage plan, which means October at the soonest.
As such, it will take time for consumption activities to fully normalise. The domestically-driven retail and F&B sectors are expected to rebound moderately in 2H20. The tourism related services sectors are expected to remain sluggish towards the end this year.
The labor market starts to deteriorate
Indeed, the impact of lifting COVID-19 restrictions on consumption could be largely offset by that of labor market deterioration. On the seasonally-adjusted basis, unemployment rate jumped to 4.1% in April, notably higher than the 3.8% in March and 3.7% in Jan-Feb. The number of companies adopting unpaid leave has risen to a record high of 1,330 as of end-May, according to the statistics from the Ministry of Labor. The number of employees under unpaid leave has exceeded 26,000, the highest since the 2008/09 global financial crisis.
The deterioration in employment and income conditions would drag the post-pandemic recovery in consumption. Inferred from the historical 2-quarter time lag between the output gap and the jobless rate, the latter is expected to rise further to about 4.5% in 2H20. This would, in turn, exert pressure on consumption and consumption-driven services sectors in the rest of this year.
The China-US tensions re-escalate
Another unfavorable development is that the China-US tensions have re-escalated. The US government broadened the ban on Chinese tech company Huawei on May 15, requiring foreign firms supplying to Huawei to seek a license – if they use American technology and software, including semiconductor manufacturing equipment. Meanwhile, the US added 33 Chinese companies and institutions to the so-called Entity List on May 22, banning them from accessing US technology.
The new Huawei ban should have ripple effect on Taiwan. There are currently 10 Taiwanese firms on Huawei’s 92 core supplier list, including TSMC, MediaTek, Largan and Foxconn. Huawei’s wholly owned subsidiary, HiSilicon, heavily relies on TSMC for the production of 7 nm and 5 nm microchips. To TSMC, Huawei is also an important client, contributing 15-20% of its annual revenues. Note that the Taiwanese semiconductor foundries need to import semiconductor manufacturing equipment from overseas, including from the American firms like Applied Materials and Lam Research. Therefore, a full execution of the new ban by the US would impair the ability for Taiwanese firms to supply chips to Huawei.
Impact on Taiwan’s exports is likely to emerge in 2H20. Huawei is reportedly to have rushed to stockpile chips, on anticipation of the new ban imposed by the US. This partly explains why Taiwan’s electronics exports have remained strong in the first four months of this year. Demand from Huawei would recede in the later part of 2020 when the 120-day grace period expires (mid-September). The “stay-at-home” demand for electronics products may also peak by then, as a rising number of countries in Europe, America and Asia roll back the lockdown measures. From the fundamental point of view, global demand for non-necessity goods would remain weak in 2H20, due to the fallout of COVID-19 on the labor market and corporate/household balance sheet. As such, it is questionable whether Taiwan’s exports-driven electronics sector can sustain its strong performance through the whole year of 2020.
Putting things together, we remain cautious about Taiwan’s post COIVD-19 outlook in 2H20, considering the deterioration in the labor market, re-escalation in China-US tensions, as well as the lingering impact of global recession. A moderate recovery in consumption/services sectors would be largely offset by weakness in exports/manufacturing, in our view.
We maintain the full-year GDP growth forecasts at -1.0% for 2020 and 2.9% for 2021. As the output gap has turned negative and deflation risks are on the rise, further easing of monetary policy remains in the pipeline. We expect the central bank to cut the benchmark discount rate at the next meeting in end-June, to 1.00% from 1.125% currently.