- Latest GDP data confirmed that South Korea and Taiwan have fallen into recession due to the pandemic shock
- High-frequency indicators and industry news suggest that both economies have bottomed in 2Q and a V-shaped rebound is underway in 3Q.
- The initial V-shaped recovery would be followed by flattish growth in 4Q, considering the increase in second wave infection and geopolitics risks (China-US, Japan-South Korea).
- Implication for our forecasts: We are revising Taiwan’s 2020 GDP projection to 0% from -1.0%, and removing a 12.5bps rate cut from the policy forecast. South Korea’s growth and policy forecasts remain unchanged.
The latest GDP data confirmed that South Korea and Taiwan have both fallen into recession in 2Q due to the global pandemic shock. South Korea’s real GDP contracted by -12.7% QoQ (saar) in 2Q, a further decline compared to -5.0% in 1Q. The magnitude of contraction matched that seen during the onset of global financial crisis in 4Q08 (-12.5%). Taiwan’s GDP also shrank sharply by -8.8% QoQ (saar) in 2Q, a deeper decline compared to -3.6% in 1Q. This was about half of the pace seen during the global financial crisis in 3Q08 (-16.8%).
The higher-frequency indicators suggest that both economies have bottomed in 2Q and a V-shaped rebound is underway in 3Q. For instance, the decline in South Korea’s exports narrowed notably to -7.0% YoY in July, versus -10.9% in June and -24.6% in Apr-May. Industrial production rose a strong 7.2% MoM sa in June, after falling by -7% for two consecutive months in April and May.
Taiwan’s retail and recreation activities, as measured by Google’s location services data, almost normalised in July, versus the -6% decline in June and -12% in Apr-May. Export orders also picked up notably, rising to 6.5% YoY in June from 1.4% in Apr-May. Manufacturing PMI edged upward to 50.6 in July, above the neutral level for the first time over four months.
There is also positive news on the industry front. Taiwan’s TSMC recently revised up the capital expenditure plan for 2020 to USD16-17bn from USD15-16bn, citing the rising chip demand from 5G infrastructure and high-performance computing applications. Meanwhile, Intel said that it is forging a contingency plan to outsource some chip production to third-party manufacturers, due to the delay in its 7nm technology rollout. This may potentially benefit Samsung and TSMC, the leaders in the 5/7nm technology fields currently. In addition, Apple announced that it will move to produce the in-house designed processors for Mac computers (to replace Intel chips). This may also benefit TSMC, which was reported to be Apple’s partner in new chip production.
Second wave infection and geopolitics risks
Further ahead, the initial V-shaped recovery in South Korea and Taiwan will likely be followed by flattish growth in 4Q. This considers the increase in second wave infection and geopolitics risks. South Korea has already faced a second wave infection at home. The number of COVID-19 confirmed cases has rebounded since June, prompting the authorities to re-tighten some of the response measures, such as closing schools, cancelling public events and restricting social gathering. Consumption could lose steam after an initial strong rebound driven by the release of pent-up demand.
The impact of second wave infection on domestic demand is not a big concern for Taiwan. The number of local transmission cases in Taiwan has been contained at close to zero for about 100 consecutive days. There has been no tightening of COVID-19 restriction measures since most of them were lifted in June. Nonetheless, second wave infection and renewed lockdowns in other countries of the world could hurt Taiwan indirectly through the trade channel. The US, Europe and Japan, where the number of COVID-19 cases is resurging, are Taiwan’s important export markets, accounting for a combined share of about 30%.
Meanwhile, the 2H geopolitical picture is complicated. The China-US rivalry looks set to intensify as the November US elections draw close. The chip orders received by South Korean/Taiwanese firms from China’s Huawei will likely decline from September onwards, when the 120-day grace period of the US’s technology ban expires. Should Washington adopt broader sanctions on Chinese tech companies and/or Beijing move to retaliate by restricting American tech companies’ operations in China, it would further hurt the South Korean/Taiwanese firms highly involved in the US-China tech supply chain.
The Japan-South Korea tensions are also likely to rise in 2H. A South Korean local court has decided to proceed with the move to liquidate the seized assets of Japanese firms involved in wartime forced labor. Public notification will be made in August. In the meantime, Seoul and Tokyo need to renew the General Security of Military Information Agreement by the end of August. The existing bilateral trade disputes (e.g., Japan’s curbs of exporting the critical chemical materials used for semiconductor and display production to South Korea) will likely remain unresolved in the coming months. And some new form of tit-for-tat retaliation, including visa restrictions and tariff hikes, cannot be ruled out.
On expectations of a strong 10% QoQ (saar) growth rebound in 3Q and a tepid 2-3% in 4Q, we are maintaining South Korea’s full-year GDP forecast at -1.1%. In the base case scenario, we continue to expect the Bank of Korea to hold the benchmark repo rate steady at 0.50% in the remainder of this year, refraining from adopting the extraordinary measures like quantitative easing and zero interest rates.
Taiwan’s 2Q contraction was relatively moderate, thanks to its success in containing the COVID-19 pandemic and competitiveness in the tech sector. We are revising up Taiwan’s full-year GDP forecast to 0% from -1.0%, which implies a 7% QoQ (saar) rebound in 3Q and 2-3% in 4Q. Accordingly, we are also removing a 12.5bps rate cut from the policy forecast, expecting Taiwan’s central bank to keep the benchmark discount rate unchanged at 1.125% through the rest of 2020.