Written by Min-Hua Chiang.
Taiwan’s economy decelerated to 1.54% in the first quarter of 2020, from 3.31% in the previous quarter due to COVID-19. The private consumption was severely hit, as shown in its negative growth rate (-0.53%). In comparison, the net export remained relatively resilient (0.86%) (Table 1).
Despite economic shrinkage, the impact of COVID-19 on Taiwan’s economy is restrained compared to other countries. Singapore (-2.2%), European Union (-2.7%), USA (-4.8%), China (-6.8%) and Hong Kong (-8.9%) have reported a more significant drop in the first quarter of 2020. Taiwan’s success in controlling the spread of COVID-19 has minimized the impact of COVID-19 on its economy. As of May 11 2020, Taiwan reported 440 cases and seven deaths, lower than most other countries in the world.
Table 1 Contribution to Taiwan’s economic growth rate (YOY) by expenditure
Taiwan’s economy could have suffered more significantly due to its close economic ties with China, which was the first country with a COVID-19 outbreak. China is Taiwan’s main overseas manufacturing production site. China and Hong Kong account for nearly 40% of Taiwan’s exports and over one-fifth of Taiwan’s imports. The number of travelers between the two sides across the Strait was between 9 million and 10 million annually during the 2016-2018 period, including travellers through the “three mini links”.
Apart from the early prevention measures, the robust global demand for Information and Communications Technology (ICT) products also explains Taiwan’s relatively resilient economy. Taiwan’s external trade grew by nearly 4% in 2020 (Jan-Mar) with electronic components having the highest growth rates in both exports and imports. When several Chinese cities were in lockdown, Taiwanese producers could have filled the orders that were supposed to be manufactured in China. This is evidenced by the declining overseas production ratio to 46.7% in the first three months of 2020, from the highest 55.1% in 2015.
China’s official figures indicated that both its imports (1.9%) and exports to Taiwan (2.3%) remained moderate despite the deterioration in its overall external trade in the first quarter of 2020. China has mainly relied on importing electronic components from Taiwan. The Taiwan Semiconductor Manufacturing Company (TSMC) is the leading supplier of the integrated circuit for leading ICT branded products in China, such as Huawei and Apple.
As a result of the steady growth in external demand for ICT goods, Taiwan’s manufacturing production in “electronic components and parts” and “computer, electronics” and optical instruments have kept rising in the first quarter. In comparison, other manufacturing goods are in decline (Table 3).
Domestic service businesses are supposed to suffer significant losses due to the reduction in commercial activities. However, the official figures show that the sales revenue of wholesale businesses have increased by 2%, while retailing business deteriorated slightly by 0.6% (Table 3). As Taiwan has not locked down any city, the impact on wholesale and retailing sectors in Taiwan is relatively less severe compared to other countries with lockdown measures. Additionally, the Taiwanese government has dealt with panic-buying by encouraging people to buy as much as possible. This might have helped to boost private consumption.
Nonetheless, the impact on the tourism industry is significant. The number of foreign visitor arrivals decreased by 57% during the first three months in 2020, compared to the same period in 2019. The two largest aviation companies, China Airline and Eva Air, have suffered from a tremendous financial loss. Furthermore, several local hotels have closed due to low occupancy. The sale revenue of food services declined sharply by 6.6% in the first quarter (Table 3).
There is also a worrisome growth in the level of unemployment to consider. The number of employees at accommodation and food services declined by 6,000 people, which accounts for half of the total unemployment in services during the January-March period. Overall, the number of employed people dropped by 23,000 people during the January-March period. Official figures also show that as of May 1, 18,840 people are under “non-paid leave”. Over 20% of “non-paid leave” workers are in accommodation and food services.
Table 2 Industrial production index (YOY) growth rate by the selected manufacturing sector, unit: %
Table 3 Sales revenue growth rate (YOY) by selected service sectors, unit: %
To assist sectors and people suffering from COVID-19, the government has announced a NT$1.05 trillion (US$35 billion) stimulus package through low-interest rate financial loans, subsidies, and utility discounts. As the possibility of a vaccine and effective medication still seem like a distant prospect, the question is whether the Taiwanese government can continue to subsidize the many unemployed people and companies in trouble over a more extended period? It is argued that Taiwan can afford greater fiscal stimulus packages, given its relatively low government debt to GDP ratio (35% in 2018). In addition, Taiwan’s current stimulus packages account for 5.4% of its GDP, which is lower than Japan’s 20%, Malaysia’s 17%, Hong Kong’s 13%, Singapore’s 12% and US’ 11%.
Although the fiscal stimulus package is likely to boost short-term consumption, it is not going to be a sustainable solution. The Taiwanese government is already burdened with heavy financial responsibility for its considerable national health care expenditure. The ageing population suggests that financial commitment to elderly health care is going to increase even more in the foreseeable future.
The government will have to ensure a steady tax revenue from private sectors to maintain its fiscal strength. The key is to promote private investment. Taiwan is generally used to a lack of investment at home. But this has changed in recent years. The accumulated investment repartition has amounted to nearly NT$1,000 billion (US$33 billion) as of April 2020, from NT$840 billion (US$28 billion) in December in 2019. As the COVID-19 crisis accelerates the demand for long-distance communication equipment, Taiwan’s investment in ICT is likely to further increase. Apart from the ICT industry, investment in biotechnology, medical equipment and the pharmaceutical industry is likely to boom. Investment in daily manufacturing necessity is also vital to ensure Taiwan’s survival as foreign countries’ lockdown will restrain their supply of goods to Taiwan. The COVID-19 offers an excellent opportunity for Taiwan to readjust its industrial structure towards a more balanced economy through promoting investment in various industries.
In sum, although Taiwan’s economy is sustained relatively well in the first quarter, it does not mean that it is immune from the impact of the COVID-19 crisis. Taiwan’s exports are strongly linked with the consumption demand in western countries. As such, the ailing economy in the US and Europe implies a potentially gloomy prospect for Taiwan. The fiscal stimulus policy will help the economy to withstand in the short-term. However, if the pandemic crisis is prolonged, the Taiwanese government will have to help companies and workers to adapt to new business models and work in other emerging industries. The growing investment at home will likely help buffer the potential impact of weak external demand. The investment diversification also helps Taiwan to increase its economic resiliency during the crisis. All in all, the crisis not only poses challenges but also presents new opportunities. The economic outlook of Taiwan’s future will depend on how it can perceive and respond appropriately in advance to new global trends in a post-COVID-19 world.
Min-Hua Chiang is a research fellow at the East Asian Institute, National University of Singapore.
This article is part of a special issue on the impact of Covid-19 on Taiwan’s economy.