East Asia Econ

August data today show the impact of the weaker TWD since July: fx reserves fell, import prices ticked up MoM, and CPI inflation rose. The lesson is that without currency strength, the step-change in economic growth since 2020 is more likely to show up in domestic prices.

July export orders data show a continued reshoring, but overall export orders have clearly peaked. Today's Q2 BOP data show the rise in exports has further boosted the current account surplus. With the surplus so large, the TWD is vulnerable to the sort of shifts in capital flows seen in Q2.

The government today confirmed the export surge of 1H – and released much less pessimistic forecasts for 2H. The underlying story is simple: AI-related demand offsetting the impact of TWD appreciation and tariffs. Exports are now expected to grow almost 25% this year, and GDP by 4.5%.

The export surge is boosting demand for labour, with data today showing manufacturing overtime hours in June near the highest in 15 years, and wage growth of close to 4% YoY. Overall wage growth has also trended up, but less quickly, because the demand:supply balance in services isn't as tight.

The surge in exports continued in July. Exports have now grown 30% just this year, and the trade surplus has risen to 20% of GDP. But the underlying dynamics shifted last month. Rather than semi exports to the US, the big driver was other exports to ASEAN. That looks more like tariff front-loading.

The biggest takeaway from today's July price data is the big fall in TWD import prices – and thus PPI and goods in CPI – on the back of currency appreciation. Core actually ticked up in July, and probably isn't going back to the sub-1% rate of pre-covid. But I doubt it gets back above 2% either.

The PMIs haven't been great lead indicators this year: they've been mainly below 50 in Q2, and yet export data have been absurdly strong. Some of that is because the export story has become so concentrated in semiconductors. Still, it is likely that the real economy will be quite a lot weaker in 2H.

It isn't news, but the strength of exports in today's GDP release is still eye-catching. It keeps Taiwan on the much higher post-2020 plane of growth. But with consumption weakening, GDP is now almost all about exports. If there's been lots of tariff front-loading, 2H25 will look very different.

Three things stood out in TSMC's earnings call yesterday: the lack of talk of "tariffs", the bullishness on demand, and confidence on margins despite TWD strength. The message has macro significance, with one risk that while TSMC and the government expects a much slower 2H, that is too pessimistic.

Overall exports, and the trade surplus with the US, continued to surge in June. That Taiwan nonetheless wasn't the recipient of a Trump letter may be because of the sharp rise in the TWD. Other data today show that helping to push down inflation, opening up space for interest rate cuts.

My model points to a rising risk of CBC tightening. But that reflects the export blow-out of 1H25, and neither markets nor officials expect that to persist. Moreover, there are the inklings of a structural rise in the TWD, which would mean tightening via the currency. Rates could actually be cut.

This year's surge in export orders continued in April, but the drop in the diffusion is warning of a pullback. For the current account, the strength in exports this year has been offset by rising imports and a smaller income surplus. For the TWD, export inflows have been offset by equity outflows.

A video bringing together the arguments I have been making for the last few months on how the economic factors that that helped anchor the TWD in its tight 28-33 range from the late 1990s are now changing.

The market sees TWD moves as a function of US pressure and lifers. The CBC says it is all about exporters. I see a step-change in exports from 2020 that has ended deflation and exacerbated the CA surplus. The TWD consequences of that shift are stronger if US tariffs don't trigger a global recession.

I can't claim to have expected the 10% surge in the TWD in the last couple of days. But I have been arguing for a while that the risks of a structural appreciation of the currency were real and rising. This is a brief presentation from March that highlights the issues.

GDP growth in Q125 reached almost 10% saar. That is all about exports, and so is vulnerable to tariffs. But it also furthers the step-change in growth evident since 2020. Before then, Taiwan was growing at a similar pace to Korea. Now, the two economies couldn't look more different.

Taiwan macro doesn't attract much attention, but its experience matters. Taiwan was most exposed to the 2000s China shock. That it then suffered near-deflation reflected tight fiscal policy, a lesson that needs to be learnt in dealing with the latest shock, this time emanating from the US.

In advance of the CBC meeting this week, a short slide pack on the key themes in Taiwan. In particular, the rise in inflation (I took the photo at my favourite bread shop here today) and Trump's agenda keep the TWD in play for a structural realignment stronger.

The spike in inflation seen in January isn't unexpected given consumer spending on the back of this year's early Chinese New Year. The strength of exports can't be explained away in the same way, and suggests Taiwan's relative outperformance is continuing.

Despite a surge in capex, GDP growth slowed in Q424 to 1.8% YoY, the lowest since September 2023. 2025 as a whole should be better, with modest growth in exports and private consumption. The upside risk is wage growth feeding into stronger consumption. Downside comes from the Trump tariff threat.

Already Taiwan's dominant firm, strong 2024 results mean TSMC has now doubled in size just since 2021. The firm remaining bullish for 2025 is this a reason to be optimistic about Taiwan's exports, but also to think the domestic cycle can warm up further. The contrast with Korea is huge.

Taiwan has the strongest cyclical picture in the region. It isn't gaining further momentum, so rate hikes aren't likely, but nor are cuts. The other big factor is Trump. He won't like either Taiwan's massive trade surplus, or its modest military spending.

The CBC kept policy unchanged yesterday, and won't be in a rush to move in 2025. Growth will be slower, but the bank isn't particularly worried about either exports, or domestic demand. Optimism about consumption is partly because of expected wage hikes, which in turn will support inflation.

There's rarely much interest in Taiwan macro. But 2025 could be different: with post-2020 domestic economic lift-off, and the return of Trump, the circumstances that have kept the TWD undervalued for 20 years might be changing. This is a detailed chart pack looking at the issues involved.