Economic Analysis
Taiwan

Taiwan

Population 23,492 million
GDP per capita 22 263 US$
A3
Country risk assessment
A2
Business Climate
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Synthesis

MAJOR MACRO ECONOMIC INDICATORS

  2014 2015 2016 (e) 2017 (f)
GDP growth (%) 4.0 0.7 1.4 1.7
Inflation (yearly average) (%) 1.2 -0.3 1.1 1.1
Budget balance* (% GDP) -2.7 -1.8 -1.6 -1.3
Current account balance (% GDP) 12.0 14.6 15.0 14.4
Public debt (% GDP) 37.9 36.5 35.7 34.4

 

(e) Estimate (f) Forecast

STRENGTHS

  • robust external financing position
  • R&D supported by public spending
  • Consensus on democratic achievements
  • World’s 4th largest electronics producers

WEAKNESSES

  • External trade concentrated on Mainland China and the United States
  • Massive relocationsweakening the employment market
  • Services sector’s lack of competitiveness
  • Infrastructures lagging behind those of other advancer Asian economies

RISK ASSESSMENT

Growth is expected to remain constrained by weak global demand

After slowing sharply in 2015, growth rebounded slightly in 2016. This trend is expected to continue in 2017. The level of economic activity will however remain seriously constrained by the slowdown in continental China. On top of this, since President Tsai Ing-wen took office, diplomatic and economic relations between the two neighbours have deteriorated. As a quarter of Taiwanese exports (among which electronic products account for almost 40%) go to mainland China the contribution of foreign trade to growth is likely to remain limited . The moderate growth of the US economy will not help in sustaining export demand, either. The impact of  weakened external demand on exporting companies’ performances will also hold back investment.

The growth in household consumption, the main driving force of activity, is expected to remain slow. Despite the continuing low levels of unemployment and inflation, the virtual stagnation of wages could undermine consumer confidence and lead to reduced spending. The increase in the minimum wage (+5% in 2017) and improvements to the healthcare cost system should however help prevent any drop in household demand.

The numbers of tourists from continental China are likely to continue to decline which will hit the services sector. The arrival in power of the Democratic Progressive Party, less favourable to any rapprochement with Beijing, has resulted in a falling off in tourists from mainland China.

Finally, with the signing of free-trade agreements with Singapore and New Zealand in 2013, the island is making efforts to maintain the dynamic of opening up. The problems in creating free-trade areas will however slow its economic expansion.

 

Its financial situation will remain strong 

The contraction in the budget deficit should continue in 2017, with the government continuing its budget consolidation policy despite the slow recovery of the economy. The extension of the social protection system will be financed by higher taxes on tobacco and a reform of the inheritance tax regime. In this context, the weight of public debt, already at a sustainable level, will continue to shrink.

The current account surplus is expected to contract but will remain at a high level. This is mainly thanks to a strong trade surplus but also a surplus in services. However, the depressed state of global demand is likely to result in a slight deterioration in the balance of goods and services.

Taiwan’s external position remains strong: the island is one of the world’s leading creditors and the level of reserves will remain high (almost 18 months’ imports in 2017). Supported by a large current account surplus, the Taiwanese dollar is likely to hold steady against the US dollar. Monetary policy is expected to remain relaxed in order to bolster activity, limit any rise in the currency and maintain the price-competitiveness of exports.

 

Worsening in relations with mainland China

The presidential and parliamentary elections in January 2016 resulted in the victory of the opposition party, the Democratic Progressive Party (DPP). The President, Tsai Ing-wen, has a majority in parliament and came to power on 20 May.

Whilst the KMT and the previous President had been in favour of a policy of rapprochement, in particular economic, with mainland China, the DPP has adopted a harder stance and refuses to the support the “1992 consensus” which governs the relations between Taiwan and China. Mainland China has suspended its official communications with Taiwan. No progress can be made in terms of bilateral relations as long as the dialogue process is suspended.

Whilst the policy of rapprochement with China was initially well received by the Taiwanese people, they do not seem inclined to extend this collaboration into the political sphere. In March 2014, the “Sunflower” student movement, opposed to the TISA (Trade In Services Agreement) project and more generally the increasing influence of China over Taiwan, resulted in a 3 week occupation of the Parliament. These demonstrations highlighted the fear of increased economic dependence and starting unification talks.

By upsetting China, Taiwan has also reduced the likelihood of the implementation of other regional integration projects that would be subject to Beijing’s goodwill.

Finally, the business climate in Taiwan is extremely positive.

 

Last update: March 2017

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