Covid outbreak and Taiwan’s outlook
- Consumption and services sectors are likely to take a hard hit in 2Q
- Impact on exports and manufacturing supply chain should be limited
- We are keeping the full-year GDP forecast at 5.0%...
- …which incorporates both stronger-than-expected growth in 1Q and downside risks in 2Q
- Fiscal policy is expected to be expanded; monetary easing unlikely
A sudden and sharp outbreak
Taiwan is facing its biggest COVID-19 outbreak since the start of the pandemic last year. The island has reported more than 100 new COVID-19 cases for three consecutive days on May 15-17, far exceeding the previous peak level of 20-30 per day in March 2020. Most of the new cases are community transmissions. The capital Taipei and its surrounding New Taipei City, which account for 30% of the island’s total population, are the main infection hotspots.
Uncertainties are high. Taiwan’s success in containing the pandemic last year was largely attributed to early border controls, mask wearing and other preventive measures. The post-outbreak management capabilities (e.g., mass testing, quarantine, treatment) have not undergone a major test thus far.
Meanwhile, in light of the earlier success in pandemic containment and the shortage of global vaccine supply, the vaccination progress has remained slow in Taiwan. The percentage of population that has received one dose of vaccines stands at less than 1% currently.
Public sentiment appears fragile, due to the lack of experience of a major outbreak and a full lockdown. There has been news reporting the panic buying of food and toilet paper by households and individuals in the past few days. The stock market has also reacted negatively, falling more than 10% over the past one week.
Consumption to decline in 2Q
In response to the outbreak, the government has raised the nationwide COVID-19 alert level to Level 2, for the May 11 – June 8 period. The alert in Taipei and New Taipei City has been raised to Level 3, for May 15 – May 28. Under Level 3, many public venues need to be shut down, and public gatherings are limited to 5 persons indoor and 10 persons outdoor. Consumer spending on entertainment, transportation, dining and shopping activities is likely to fall notably in the Apr-Jun quarter. The related services sectors will likely take a hard hit.
Private consumption is expected to decline on the QoQ basis in 2Q. The magnitude of decline could match or even exceed the -10% (QoQ saar) seen in 1Q and 2Q 2020.
If the number of local infections were to stay above 100 for 14 consecutive days, the COVID-19 alert could be raised further to the highest Level 4, according to the head of the Central Epidemic Command Center. Under this scenario, people will be encouraged to stay at home, working places and schools will be closed, and all public gatherings will be suspended. Consumer spending would plunge more sharply under such a “lockdown” scenario.
Exports and supply chain not a big worry
Adverse impact on exports and manufacturing supply chain should still be limited. For now, we continue to expect exports and industrial production to sustain double digit growth in 2Q, at about 30% and 10% YoY respectively.
Taiwan plays a crucial role in the global semiconductor supply chain – it is the world’s largest base of wafer foundry and IC packaging and testing. Many of the large semiconductor firms including TSMC and UMC are headquartered in Hsinchu, less than 100km away from Taipei. Still, this does not mean semiconductor production will be very vulnerable to virus disruptions. Compared to the traditional manufacturing sectors, the semiconductor sector adopts automation technology to a relatively large extent. To support the complex chip manufacturing process, semiconductor firms also set persistently high standard on the safety and cleanliness of their production environment.
Taiwanese PC, smartphone and consumer electronics makers, such as Foxconn and Quanta, have already moved their key production facilities to mainland China in the past decades. There is no big worry about their operation in the Chinese factories, as the virus situation in China appears well under control.
The non-tech manufacturing sectors, such as textile, machinery, plastics, chemicals, would be relatively vulnerable if a “lockdown” takes place.
As far as exports demand is concerned, the worsening of COVID-19 crisis in India may weigh on global smartphone demand in 2Q – India is the world’s second largest smartphone consumer market just after China. Nonetheless, the virus resurgence in India and some Southeast Asian economies would also spur the demand for PCs and other consumer electronics products that support WFH and homeschooling. Furthermore, in major developed economies like the US, vaccination has continued to gather pace, which still bolsters the case for a recovery in their economic/trade activities this year.
Prior to the recent virus outbreak, GDP growth rose more than expected by 8.2% YoY in 1Q. The strong results in 1Q in fact justify an upgrade of the full-year growth forecast to 6-7%. Taking into account the downside risks in 2Q, we are keeping our full-year GDP forecast at 5.0%.
There is sufficient room for fiscal policy to be expanded, to cover the costs of coronavirus testing, healthcare facilities and vaccination, and mitigate the economic impact on the vulnerable services sectors. Thanks to the successful pandemic control and steady economic growth last year, the central government’s debt to GDP ratio has remained low and stable, at about 30%. Indeed, the cabinet already proposed last week to boost the size of COVID-19 special budget to TWD630bn from TWD420bn. This represents a TWD210bn increase in fiscal spending, or 1% of GDP.
The room for monetary easing is relatively limited. The benchmark discount rate is currently at a record low of 1.125% and the short-term real rates are in the negative territory (CPI: 2.1% YoY in April). Low interest rates and excess liquidity have fuelled property prices and obliged the central bank to tighten credit rules since December 2020. A drastic shift to monetary easing is unlikely, in our view. We expect the central bank to hold the benchmark rate steady at the 2Q policy meeting in June. We do however expect it to expand the special lending facilities, to provide liquidity support for the pandemic-hit industries.To read the full report, click here to Download the PDF.
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