Taiwan outlook 2021: A sweet spot of limited covid-19 impact and growing demand in tech products

If 2020 was a test, Taiwan has passed with flying colors. As the world is trapped in the endless cycle of lockdowns, Taiwan is out of the woods with stellar growth. The early containment measures have paid off with a less bumpy ride in domestic demand. Export growth has also held up well with demand in high-tech products. Together with the rollout of vaccines and the recovery in global economy, these factors will continue to bring momentum to Taiwan in 2021.

On domestic demand, the impact of the Covid-19 is limited on consumption as Taiwan has the lowest fall in mobility in Asia and the government support is sufficient. While private investment is hammered by uncertainties, the overall investment is lifted by fiscal spending. In 2021, better consumer sentiment and eased labor market pressure will support household spending. Given the improved business sentiment, local firms are expected to increase investment to meet higher global demand, especially in semiconductor and information and technology (ICT). Inward foreign direct investment (FDI) is also expected to remain resilient driven by European firms and the repatriation of Taiwanese investment from Mainland China, especially in manufacturing.

As for the external demand, export growth has rebounded from 0.5% in H1 2020 to 8.9% in H2 2020, driven by better growth prospects in the US and Mainland China. With more export orders, foreign demand is expected to be strong in 2021 driven by 5G, internet of things, data centers and electric vehicles. The ongoing push for green energy will also consolidate Taiwan’s position in the global value chain as international firms raise their commitment to ESG for their suppliers.

On monetary policy, the CBC is likely to keep powder dry as growth prospects remain solid. Although the CBC has tightened macro-prudential policies for real estate, it is unlikely to see any rate hike as this could attract hot money and add fuel to the strong currency. With the change in FX policies and ongoing direct and portfolio investment inflows, we expect the USDTWD to appreciate at a moderate pace.

The abundant liquidity is fueling real estate prices and equities. Housing prices in Taipei City grew 7.9% YoY in November 2020, the fastest pace since 2014. For commercial properties, the outlook is also positive with low vacancy. But more macro-prudential policies are expected if the prices for residential properties and industrial land surge too aggressively. In addition, equities will be lifted by semiconductors, but there will be divergence in sectors and volatility from geopolitics.

All in all, we have upgraded our Taiwan’s GDP forecast to 3.1% in 2020 and 4.6% in 2021 with strong semiconductor demand and construction activities as well as the global economic recovery.

Full report available for NATIXIS clients.