Taiwan raises growth forecast while Covid risks still build

Taiwan raised its forecast for economic growth for this year amid an export boom for computer chips, though a recent surge in Covid-19 cases is clouding the outlook.

The government on Friday increased its full-year estimate for gross domestic product to 5.46% from a previous projection of 4.64%. It also raised its estimate for first-quarter GDP growth to 8.92%—the fastest pace in over a decade—compared with 8.16% previously.

This year’s rosy outlook will increasingly depend on Taiwan’s ability to keep factories running at full steam despite the Covid-19 outbreak and soft lockdown measures imposed since mid-May. A global shortage of computer chips produced by the likes of Taiwan Semiconductor Manufacturing Co. has so far bolstered exports and GDP growth.

“If Taiwan’s Covid situation can be brought under control by end-June, the economic hit is likely to be concentrated in the services sector,” Angela Hsieh, an economist at Barclays Bank Plc in Singapore, said in a message before the GDP report. “One very important point to look out for is whether or not manufacturing activities suffer any disruption.”

Hsieh downgraded her initial full-year GDP forecast by 50 basis points to 6.1% but warned that Taiwan’s slow roll-out of vaccines leaves it vulnerable to renewed outbreaks.

Taiwan was one of the world’s few developed economies to expand in 2020 as the health authorities managed to keep the coronavirus at bay, meaning domestic consumption was largely unaffected.

But the virus managed to make it past border defenses in April, prompting the government to implement a soft lockdown in May, shutting entertainment and recreation venues, closing schools and ordering restaurants to offer take-out service only.

Societe General SA economist Michelle Lam sees the potential impact on services weighing on growth in the second and third quarters. But she says the Covid restrictions are unlikely to have much impact on companies’ plans to increase their capacity and meet overseas demand for semiconductors and other technology products.

“The impact of Covid-19 on business capex is likely to be muted, supported by the semiconductor industry and reshoring,” she said in a message before the GDP report. “Given the supply shortage, several major foundry firms have ramped up their capex plans massively to meet the rapidly expanding demand.”