Via Financial Times

As economists rewrite their forecasts to reflect the doom created by the coronavirus pandemic, one country has come off relatively lightly.

Taiwan has managed to contain the outbreak better than its peers, with 420 confirmed cases and six deaths. This has allowed authorities to avoid implementing the type of national lockdowns seen elsewhere. Economists believe this will help it avoid the catastrophic slump expected for many other countries.

Schools, offices, restaurants and most entertainment facilities in Taiwan remain open. International tourists are gone, but locals do travel — at a holiday weekend in early April, 1.5m descended on 11 of the country’s biggest resort areas.

“This does make a really big difference. We are learning now that the economic cost of a one-month lockdown is a 3 per cent contraction of full-year GDP,” said Shaun Roache, chief Asia-Pacific economist at S&P Global Ratings. “Taiwan avoided that. Taiwan can avoid some of the worst economic pain.” 

Having learnt the lessons of Sars in 2003, Taiwan moved weeks earlier than other governments to screen arrivals from China and then close its borders to Chinese citizens. It was also quick to introduce strict quarantine measures, health monitoring and contact tracing of infected individuals. The steps have been credited with preventing large-scale local transmission and the government has only had to introduce relatively light social distancing.

Chart showing pandemic has had little impact on Taiwan’s manufacturing industry so far. Purchasing managers’ index, manufacturing composite, March 2020

All of this has helped cushion the blow to Taiwan’s domestic economy. The IMF forecasts it will contract by 4 per cent this year — a deterioration that is less deep than that of other advanced economies.

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S&P predicts a decrease of just 1.2 per cent of full-year gross domestic product and, like many other economists, has revised Taiwan’s growth for this year by a much smaller margin than any other country.

In Taiwan itself, the government and private-sector analysts expect growth to remain positive this year. The central bank has reduced its forecast for full-year GDP growth from 2.57 per cent to 1.92 per cent.

In February, the first full month of Covid-19 infections in Taiwan, retail and restaurant sales rose compared with the same period last year. Although the rate was just 0.5 per cent, it was meaningful as private consumption accounts for just over half of GDP. 

Bar chart of mobility on April 11 2020, compared with a normal baseline period (%) showing that behaviour has changed very little in Taiwan

Analysts warn that any optimism must be tempered by the realisation that the situation could deteriorate. Consumer sentiment in March — the month when Taiwanese people returning from travel, work and studies abroad led to a second wave of infections — is expected to have worsened sharply. The purchasing managers’ index plummeted by a total of 35 percentage points in February and March, its fastest decline since the index was started in 2012, reflecting deep concerns among manufacturing businesses.

The continuing lockdown in key exports markets in Europe and North America could also negatively impact Taiwan.

“After the supply chain disruptions when the disease first hit in China, and the blow to domestic sentiment when tourism was switched off and people started worrying about local infections, we are now about to see a third wave of economic fallout: the collapse of global demand,” said Wang Jiann-chyan, deputy director of the Chung-Hua Institution for Economic Research (CIER), the government think-tank which compiles the PMI. “This will, of course, hurt our exports.”

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Mr Wang said CIER would cut its full-year growth outlook to under 1 per cent unless the government drastically expanded its stimulus package. Taipei has offered NT$1.05tn ($35bn) to support the hardest hit.

Apart from rescue measures for airlines, hotels and travel agencies, the government is targeting the country’s vast number of small enterprises. Service-sector family businesses such as night market vendors or hairdressers can get up to 30 per cent of their power and water bills and up to 40 per cent of their salaries subsidised.

Column chart of annual % change in GDP showing that IMF forecasts Taiwan will contract less than other advanced economies

The government is sending financial advisers to markets to help vendors obtain loans. Many of these microbusinesses have no tax registration and have never dealt with a bank.

Kung Ming-hsin, a minister in charge of coordinating economic policy, said Taiwan’s success in containing the outbreak gave it flexibility in determining its economic crisis response. “Our goal is to protect our companies and our labour force so they can hang on and survive until the global economy springs back to life,” he said. “We need to keep the temperature until then.” 

Taiwan is better placed to achieve that than many others. “They may not be able to avoid technical recession, but it will be a fairly shallow one. In times like these, that is not that negative,” said Mr Roache.