US, China economic woes point to end of Taiwan’s chip-led boom

US, China economic woes point to end of Taiwan’s chip-led boom
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(July 29): Taiwan’s trade-reliant economy is coming back down to Earth after a banner year for growth as its biggest export markets slow and global demand for electronics and semiconductors starts to wane.

Economists expect gross domestic product grew 3.15% in the second quarter from a year ago. That would be slightly better than the 3.14% expansion from the January-to-March period, but well below the numbers recorded in 2021. Taiwan reports its latest GDP data on Friday.

“Taiwan was in an enviable position during the global Covid shock, but higher inflation and weaker demand worldwide are now faltering its growth prospects,” said Gary Ng, senior economist at Natixis SA. “The once-booming semiconductor industry will also face downside risks as consumers turn cautious.”

China and the US are Taiwan’s two largest export markets, which combined account for just over half of the island’s overseas shipments.

An economic slowdown in the US has sparked recession talk as officials struggle to rein in the highest inflation in 40 years without cratering the economy.

The Chinese economy, meanwhile, has been weighed down by ongoing Covid outbreaks and resulting regional lockdowns, leading economists to downgrade their forecasts for growth in 2022 to 3.9% in a recent Bloomberg survey.

Chips are down

Global demand for semiconductors kicked off a surge in factory expansion in Taiwan in 2021. Private sector fixed capital investment rose 19.9% last year to be the largest single contributor to the 6.57% growth in GDP. In the first quarter of this year, though, the pace of investment slowed to 6.6%.

Gartner Inc is predicting an abrupt end to one of the chip industry’s biggest boom cycles: The research firm sees global sales slowing much more rapidly than previously forecast, slashing its outlook for semiconductor revenue growth to just 7.4% in 2022, down from the 14% it predicted three months ago. Sales will likely decline 2.5% next year, the company said in a report published on Wednesday.  

Taiwan Semiconductor Manufacturing Co’s most recent outlook suggests firms are weighing the uncertainty. While the world’s largest contract chipmaker raised its 2022 revenue forecast earlier this month, it also said it plans to delay some capital spending by as much as 9% from its earlier guidance.

Factory data in Taiwan underscores the concerns about the broader economy. Manufacturing output grew just 0.51% in June, according to the Economics Ministry, the weakest growth since January 2020.

The painful adjustment may only be temporary, according to Woods Chen, chief economist at Yuanta Securities Investment Consulting. He sees a positive outcome for Taiwan after its chip manufacturers managed to secure a greater global market share while their competitors struggled during the pandemic.

“The most recent boom has slowed as companies around the world manage their inventories in the post-Covid era, which may have an impact on Taiwan for three or four quarters,” he said. “But Taiwan now has a head start in the post-Covid world. Exports will continue to drive the economy but even more concentrated in the electronics sector and being concentrated in a future trend is a good thing.”