Ma Tieying
Economist
Economist
- 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.
Forecast implications
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.