A deep recession remains a downside risk.
Economic situation
GDP growth downturn in 2020, but strong economic fundamentals
Taiwan´s economy is mainly export-oriented (focusing on electronics and computer equipment, basic metals and plastics), with export of goods and services accounting for more than 70% of GDP. Electronics/ICT exports account for about 33% of total exports. Taiwan is highly integrated into global supply chains, and mainland China (including Hong Kong) accounts for about 40% and 20% of Taiwanese exports and imports respectively.
In early 2020 the lockdowns of several Chinese cities hampered the flow of goods and services to and from Taiwan, leading to delays in downstream production and shortage of upstream raw materials supply, especially in the electronics/ICT sector. Ongoing international supply chain disruptions and sharply decreasing global demand due to the coronavirus pandemic will affect Taiwanese exports, expected to contract by more than 6% in 2020. Subdued business investment and slowing production weigh on fixed investment growth.
Despite the fact that Taiwan has so far managed to slow the spread of the coronavirus, domestic demand is negatively impacted by private consumption slowdown (also due to rising unemployment). Comprehensive travel bans have stopped tourism inflow.
Currently GDP is expected to contract by about 0.5% in 2020, but even a deeper recession cannot be ruled out in case of a larger and more protracted global economic and financial downturn.
The authorities has taken comprehensive measures to support the economy. As of early April, the government has announced two stimulus packages worth USD 35 billion to support businesses in trouble and households. Public finances are very sound, as government debt remains low at about 30% of GDP, mainly denominated in local currency and held by domestic investors. This offers some room for additional spending if needed. In March the central bank cut interest rates for the first time in more than four years to a new low of 1.125%, and provided USD 6.6 billion to banks in order to support SMEs with liquidity. Deflationary pressured due to low oil prices and weak global demand provide the central bank with room to cut interest rates further if the economic outlook should worsen.
Sound public finances and a very solid external financial situation (with low external debt, very large current account surpluses, and ample foreign reserves) provide Taiwan with some resilience. However, beside a prolonged global coronavirus pandemic an escalation of political tensions with mainland China remains a downside risk, given the high dependence on trade across the Taiwan Strait. At the same time, a high trade surplus with the US makes Taiwan susceptible to protectionist measures taken in Washington.
Rising insolvencies expected
The credit risk situation and business performance of the electronics/ICT, consumer durables retail, and services (hospitality, catering, tourism) sectors has deteriorated due to the global and domestic economic downturn. A further deterioration of external demand could weigh on company profits of businesses in export-dependent sectors, mainly electronics/ICT.
Political situation
A strong mandate for the government's social and economic agenda
In the January 2020 elections President Tsai Ing-wen secured a second term with a landslide victory, while her DDP party retained its majority in parliament. This provides the administration with a strong mandate to govern.
Taiwan’s relationship with mainland China will remain the dominant political issue for the island. Beijing has scaled down high-level contacts with the incumbent more pro-independence minded government and has taken a more assertive stance in bilateral relations. However, the Taiwanese government has so far abstained from any actions that could provoke a harsh response from Beijing.