East Asia Econ

There's a possibility that TSMC's success is pushing Taiwan into unchartered waters, where the CBC needs to sound hawkish, when the external imbalance is as big as it has ever been. If Taiwan's period of zero inflation has passed, there's a good chance TWD undervaluation will be challenged too.

Taiwan's CBC kept rates on hold yesterday, but hiked the RRR to control housing. More interesting was the bank's very benign outlook: growth neither fast nor slow, and inflation falling to just within its target range. Particularly regarding inflation, that doesn't allow much room for error.

While exports jumped in August, with signs that the semi upswing is losing steam, it still seems likely that the export peak is near. Pretty much all the growth is coming from the US, which is propelling a surge in the bilateral trade surplus. That makes Taiwan vulnerable if Trump wins re-election.

After faltering in 2023, wage growth is now back on the stronger trend that began in 2021. The recovery in the manufacturing cycle gives us confidence that this can at least be sustained, but we'd still like to see a clearer lift in exports.

The moderation in core CPI inflation in June likely won't be enough to keep the central bank on hold if exports rise anywhere near the extent that equities are signalling is possible.

There's obviously noise from month to month, but the step-change in wage growth since the pandemic – following an earlier acceleration in 2017 – looks to be holding.

Far from gaining momentum, Taiwan's exports fell in May. That is at odds with some other indicators for the mfg cycle, but as long as exports are soft, the overall cycle will be too.

Services inflation will likely ease, but there's upside risk for inflation overall, because of a potentially big rise in exports when import prices are recovering, and unemployment is low.

It has taken a long time, and still isn't powerful, but recovery is finally being seen in the manufacturing PMIs. At the same time, non-manufacturing isn't slowing down much, and price pressures are picking up again. Taiwan doesn't look like an economy where policy is too tight.

The PMIs show no change in the trends: manufacturing is weak, while non-manufacturing is relatively strong. But equally, it remains likely that there will be a transition to manufacturing-led growth during the remainder of 2024.

Exports and manufacturing remain sluggish, but the leading indicators look strong. At the same time, services activity remains firm, unemployment is at 20 year lows, and inflation at 20 year highs. If exports do kick in as the leads suggest, it is easy to imagine the central bank having to hike.

This note is a bit different to our usual offering. It is still relevant to investors, but it is more of a guide to the economic issues that I would be thinking about if I were a voter in Taiwan. That includes one observation, and five questions that politicians should be answering.

We would have thought Taiwan would now be at the stage where exports were more clearly taking over from the domestic sector as a driver of growth. Instead, recent industrial data have been sluggish, while domestic momentum is holding up. Unemployment continues to fall.