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Taiwan Economic Outlook

The economy has performed well in recent months, following solid growth in the first quarter. The manufacturing sector regained momentum in June after four months of decelerating growth, according to survey data. The sector expanded faster in June than in May due to new orders from abroad. Furthermore, industrial production expanded at a healthy pace in May due to strong output of electronic parts and components, and unemployment fell to a four-month low. On the political front, the Legislative Yuan passed amendments to the Company Act on 6 July aimed at improving corporate governance, making it easier to raise funds and reducing money laundering. On the same day, rules were also amended to make it easier for domestic companies to be listed on the Taiwan Stock Exchange. Both developments in July are encouraging for business confidence.

Taiwan Economic Growth

A tight labor market should drive household spending this year. Momentum in the external sector should remain solid but will likely moderate from last year. A main downside risk is the escalating trade feud between China and the U.S., as electronic products—Taiwan's flagship export—are heavily integrated into both countries' supply chains. Other risks include higher cross-strait tensions, given Taiwan's dependence on China as its main export market, and the increased migration of high-skilled workers to China. FocusEconomics panelists forecast GDP growth of 2.6% this year, which is unchanged from last month's forecast. GDP growth is seen at 2.4% in 2019.

Taiwan’s economic freedom score is 76.6, making its economy the 13th freest in the 2018 Index. Its overall score has increased by 0.1 point, with a lower score for investment freedom offset by a significant improvement in fiscal health. Taiwan is ranked 5th among 43 countries in the Asia–Pacific region, and its overall score is above the regional and world averages.

A relatively well-developed commercial code and open-market policies that facilitate the flow of goods and capital have enabled small and medium-size enterprises to become the backbone of Taiwan’s expansion. A sound legal framework protects property rights and upholds the rule of law. To achieve its goal of reducing dependence on China by increasing commerce with other Asian countries, Taiwan will need to make more reforms to increase competition and openness by, for example, reducing the state’s “strategic” involvement in the export sector and opening the fragmented financial sector.