Taiwan

The Taiwan economy fell into recession in H1 2020 (two consecutive quarters of negative sequential growth). That said, it was a relatively shallow one compared to some Asian neighbors, and we see Taiwan as being among the economies recovering earlier from the Covid-19 economic shock. This is thanks to a management of the local epidemic that was deemed successful, and strong economic ties with a recovering mainland China. Furthermore, Taiwan will benefit from the global drive for equipment for remote working and online schooling. Indeed, the electronics sector performed well in H1 2020, partly making up for the slump in non-technology industries and tourism, which were hit hard by the global pandemic.

We expect Taiwan's economy to register a full-year recession in 2020, with GDP contracting by -0.3% (after +2.7% in 2019). A gradual recovery should bring growth to +3.4% in 2021. In this scenario, GDP should come back to pre-Covid-19 levels around the middle of 2021. Downside risks to our scenario include developments in the global pandemic,in the short term, and Taiwan’s increasingly tense relationship with mainland China and potential further escalations in the U.S.-China trade tensions in the medium run.

The current account surplus stood at a healthy +10.4% of GDP in 2019 and is expected to narrow only slightly in 2020 (+9.2%). Extensive foreign exchange reserves cover nearly 20 months of goods imports. Long-term risks do exist and stem from elevated tensions with mainland China (Taiwan’s main trade partner) and a strong dependence on the electronics sector. In this context, diversification of trade partners and product innovation will be pivotal. In that respect, the Tsai administration has put the emphasis on various initiatives, including the improvement of infrastructure to improve accessibility, a reshoring drive (Invest in Taiwan), an ambitious industrial policy (5+2 Major Innovative Industries policy) to create new competitive growth drivers and a cooperation policy (New Southbound Policy with South East Asian market) in order to boost and diversify trade with other Asian partners.