Good news #1: GDP has reached the threshold of developed nations

According to the latest estimates published by the Directorate-General of Budget, Accounting and Statistics (主計總處), if the exchange rate of the New Taiwan dollar is anchored at 29 to a dollar, by the end of 2021, Taiwan’s GDP per capita would grow by more than one thousand dollars to reach US$30,803, thus clearing the US$30,000 threshold that sets the bar for developed countries.

Even so, Taiwan would still be the last of the Four Asian Dragons to cross the threshold.

Good news #2: The GDP is at its second-highest level in a decade

The second piece of good news is this: Boostered by the three pillars of export, domestic demand, and investment, Taiwan’s GDP is forecasted to grow by 3.83% in 2021, the second highest in a decade. 

“In fact, by the second half of 2020, consumer spending was already looking pretty good,” says Peng Su-ling (彭素玲), Director of the Center for Economic Forecasting at the Chung-Hua Institution for Economic Research.

Starting in the third quarter, domestic “revenge spending” has made this year a very fruitful one for retailers. Travel restrictions have turned Taiwan into one of the world’s most lucrative markets for luxury items.

The Directorate-General of Budget, Accounting and Statistics estimates that consumer spending will surpass ten trillion dollars in 2021. 

Speaking of exports in 2021: “This will be the year when the trifecta of Huawei, the vaccine, and the exchange rate comes together in a confluence of interconnected effects,” says Yin-Ji Huang (黃蔭基), Chief Economist at SinoPac Financial Holdings. 

“Huawei” represents the macro trade environment in general. Huang predicts that when President-elect Joe Biden takes office in January, his diplomatic priorities will shift toward Russia, and the tensions between China and the U.S. will de-escalate. 

Since world trade has declined by 10% in 2020 and is currently still in a slump, the World Bank forecasts trade will shoot up by a heady 8.3% in 2021. What’s more, as the COVID-19 vaccine becomes available around the world, daily life and consumption will eventually return to normal. Think tank IHS Markit predicts that global economic growth will reach 4.2% in 2021, which is 40% higher than the average.

Taiwan’s major export markets both show signs of “revenge spending”: China will grow by 7.4%, and the U.S. by 3.1%. Taiwan’s export numbers, already impressive in 2020, will continue to swell next year.

The DGBAS estimates that in 2021, the total exports of goods (which is calculated in US$) will grow by 4.59%. The trade surplus will reach US$90 billion, which is about the same as this year. The Taiwan dollar will not lose value any time soon.

Taiwan Dollar Exchange Rate is the Biggest Game Changer

Huang shares his analysis: The current exchange rate of the Taiwan dollar is bad for exports, but the impact differs among industries. The competitiveness of electronics exports is less affected by the exchange rate. But for traditional industries like petrochemicals and machine tools, which are beset by other Asian competitors, the exchange rate makes a big difference.

What is worrisome is this: “If the exchange rate of the Taiwan dollar reaches 28.476, Central Bank Governor Perng Fai-nan's famous ‘defense line’ would be breached,” Huang declares.

The last time the Taiwan dollar was 28 to a dollar was during the Asian financial crisis of 1997.

Right now, there is an understanding that the Fed will not raise interest rates for three years. A weak American dollar, coupled with the delay in publishing the latest list of currency manipulators, means that Taiwan’s Central Bank is hesitant to make any drastic moves. A strong Taiwan dollar could become the biggest game changer in Taiwan’s economy.

Good news #3: Private Investment at an All-Time High

The third piece of good news for 2021 is that private investment in Taiwan is approaching the four trillion mark. 

Earlier forecasts showed investments slowing in 2021. But now, on the contrary, the DGBAS predicts that private investment, public investment, and routine investment from state-owned enterprises would reach a total sum of 4.83 trillion in 2021. Public investment in infrastructure and defense spending will grow by 10 billion, as per usual. Private investment will grow 170 billion to reach 3.91 trillion.

It is estimated that routine investment in 2021 will have a real growth rate of 3.19%, clearing the 3% threshold for the fourth consecutive year.

In truth, the lack of investment was the main factor why Taiwan’s economy has been sluggish so far this century. The gutting of the manufacturing sector, paired with low wages in the service sector, was one of the major reasons why Taiwanese salaries have been so slow to grow. In the last twenty years, investment in Taiwan has never grown by more than three percentage points for four consecutive years.

“This wave of investments is the strongest in two decades,” says Ray Yang (楊瑞臨), Consulting & BD Director of the Industry, Science and Technology International Strategy Center (ISTI) at the Industrial Technology Research Institute (ITRI).

There are many who think this tide of hot money is the spoils of the COVID-19 pandemic, as well as the trade war between China and the U.S. But Yang says industries are undergoing a structural change, so there is a chance this wave of investment will continue. 

For one thing, in the next ten years, tech products will trend toward high mix, low volume. This sea change will begin with 5G applications. Cheap labor will become less competitive than before. Taiwanese investments will shift from the pursuit of economy of scale to enabling highly automated production. 

For another, as TSMC’s position in the global semiconductor industry solidifies, many foreign vendors who are part of the high-end manufacturing supply chain are coming to Taiwan to establish business clusters. The domestic production of semiconductor equipment will also give birth to new professions. 

The third factor is that, in order to discover new opportunities, big companies are investing big money in startups. New life is being breathed into the world’s newest companies.

In a normal economic cycle, investment is usually the harbinger of things to come. With enough funding, production ramps up, prices become competitive, and profits improve. Then, new employees are hired and salaries are raised.

Taiwanese Industries Undergoing Structural Change

Tzu-Ting Yang (楊子霆), Assistant Research Fellow at Academia Sinica’s Institute of Economics, says the reason why wages have not kept up with economic growth in Taiwan for the past 20 years is due to the worsening of trade conditions. Compared to what Taiwan imports, the things we sell just weren’t worth that much. The only way to keep the economy growing was to charge less and sell more, which was why salaries have been stagnant. 

Have Taiwan’s trade conditions improved due to the China-U.S. trade war? “Unfortunately, that has yet to be seen,” he says.

However, there is a silver lining. According to Yang, once the funding is in place and high-tech, high-end assembly lines open for business, Taiwanese exports can gradually shift from economy of scale to greater added value. This will improve our trade conditions. Once the economy reaps the benefits, wages will surely go up.

Bad news #1: Property Prices Jumping the Gun

It’s worth noting that although pay has yet to increase, too much loose capital may lead to ballooning property prices, especially in central and southern Taiwan. 

Chang Ting-hsuan (章定煊), Associate Professor of the Department of Finance at Jinwen University of Science and Technology, notes that out of Taiwan’s six special municipalities, Tainan, Kaohsiung, and Taichung were merged together from the original municipal city and county. This means that a great deal of land allocated to those municipalities is not in urban areas. So the ratio between property prices and incomes as published by the Ministry of the Interior is actually inaccurate.

Unlike the previous wave of soaring property prices, when the focus was on upscale mansions in Taipei, New Taipei, Taichung, and Kaohsiung, metropolitan areas in central and southern Taiwan tend to be smaller. Therefore, a few high-profile purchases can disproportionately affect average house prices. 

That is precisely the situation we are witnessing. A limited number of deals in central and southern Taiwan are unbalancing property prices and negatively affecting residents. But when it comes to unreasonable house prices:

“In the north, young homebuyers are not shy about speaking up. Yet those affected in central and southern Taiwan tend to be disadvantaged and disenfranchised youth.” Chang warns, “A sudden price hike of a million dollars may not seem like much in Taipei, but down south, it is enough to drive one to desperation.”

This October, according to house prices published by the Ministry of the Interior, the greatest leap forward was in Chiayi City, where the increase year-over-year was 8%. Among the six special municipalities, the largest increase appeared in Tainan. Ironically, both these places are suffering from a decline in population. In all of Taiwan, only the populations of New Taipei, Taoyuan, Taichung, and Hsinchu are growing.

Bad news #2: The Future Grows Grim from 2022

The worst is still to come: The world economy is expected to contract instead of expand after 2022. “2021 will be the best year out of the next five years,” predicts Yin-Ji Huang.

He puts it bluntly: 2021 was the rebound after the catastrophe, so global economic growth will be abnormally high. In reality, the pandemic will have far-reaching consequences. Relations between Washington and Beijing will not grow warmer. Racial tensions will escalate, and the gap between rich and poor countries will expand. Once the global economy diverges so drastically, growth in any one direction will only be negated by decline in another direction. 

"Looking at the National Development Plan published by the National Development Council, the next four years will be rough,” says Huang. 

The National Development Council published its National Development Plan in July. In it, the think tank IHS Markit forecasts Taiwan’s GDP growth for the next four years will only be 2.5%. It will be hard work to reach the growth target of 2.6% to 3.4%. 

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Translated by Jack Chou
Edited by TC Lin
Uploaded by Penny Chiang