The unknown can spawn fear but also fantasy.

That seems to be the prevailing sentiment as 2016 comes to a close and the United States has a new president-elect who plans to spend heavily to rebuild the country’s infrastructure.

“Next year will see a chaotic world, though it’s hard to tell whether things will get better or worse. But the ‘new mediocre’ will be broken through, and there will be change,” says Fubon Financial Holdings chief economist Rick Lo.

In an atmosphere of optimism despite the many unknowns, Taiwan is only sharing a small sliver of that joy.

In its latest economic forecast on Nov. 25, the Directorate General of Budget, Accounting and Statistics (DGBAS) predicted 1.87 percent GDP growth for Taiwan in 2017, higher than the estimated 1.35 percent in 2016.

“Taiwan has gradually begun to recover, even if the pace of recovery is very slow,” says Kao Shien-quey, the deputy minister of Taiwan’s top economic planning agency, the National Development Council (NDC). 

People in Taiwan will feel that limited economic prosperity in different ways next year because despite a forecast of overall economic growth, exports are expected to heat up while domestic demand cools.

Small but Steady Recovery

Taiwan’s exports returned to positive growth in the second half of 2016, and growth in outbound sales of merchandise and services has been pegged at 3.83 percent in 2017, 2.29 percentage points higher than in 2016.

There is less optimism over domestic demand. Private consumption is expected to grow 1.94 percent in 2016, compared with only an estimated 1.74 percent next year. That would be the slowest rate of growth for this metric since the 2008-2009 global financial crisis. 

Increased export growth will be driven primarily by two main factors in 2017.

First, economists anticipate stronger growth in the global economy next year. The International Monetary Fund has forecast world trade volume to grow 3.8 percent in 2017, up from 2.3 percent in 2016. Fubon’s Lo expects many countries to adopt expansionary fiscal policies by investing in infrastructure, which should push up commodity prices. The resulting rebound in global prosperity will have a positive effect on Taiwan’s trade picture, Lo believes.   

China’s changing policy represents the second major factor behind a better global economy. Beijing originally instituted supply-side reforms to eliminate weak companies and retain stronger ones, but that changed in the second half of 2016 when it no longer stressed weeding out inefficient factories that could result in massive unemployment or major lay-offs. Instead, it quietly shifted to production cuts for state-owned enterprises. Slowing the pace of reform has reduced the risk of a hard landing in China’s economy, Lo says.

As for optimism over exports, the hot topic for 2017 has been none other than Apple’s planned introduction of the iPhone 8.

Hsu Chih-chiang, an economics professor at National Central University (NCU), says there is widespread speculation that the iPhone 8 will undergo a major makeover, leading to expectations of a new handset replacement cycle next year.

“This cycle will definitely be stronger than this year’s and will drive related supply chains in Taiwan,” Hsu says.

Beyond these economic factors leading to expanded export demand, a technical issue should also propel export growth in 2017 – the low statistical baseline set in 2016, when exports were down 3.1 percent year-on-year in the first 11 months of the year.

Tough Sledding for Services Sector

In the services sector, however, workers involved in domestic sales face less optimistic prospects in 2017.

In October, the IMF lowered its forecast for economic growth in Taiwan in 2017 from 2.2 percent to 1.7 percent, the lowest projection for any of the traditional Four Asian Tigers (also including Singapore, Hong Kong and South Korea). The biggest reason was sluggish domestic demand.

In terms of private consumption, relatively strong performances by automobiles and mobile phones helped spur 1.91 percent growth in retail sales in the third quarter, helping offset the negative impact on domestic spending of a decline in visitors from China.

The government has tried to stress that overall visitor numbers to Taiwan in 2016 have not fallen year-on-year despite a plunge in Chinese visitors since May. But according to the central bank’s balance of payments report at the end of November, Taiwan ran a deficit in the travel and tourism category in the July-to-September period for the third straight quarter. The third-quarter deficit totaled US$1.40 billion, the highest for any quarter in 19 years, indicating that Taiwanese spent far more abroad on travel during the period than foreign visitors spent on travel in Taiwan.

Taiwan’s travel and tourism balance of payments had begun to show a surplus over the past four years because of the influx of Chinese visitors and their spending power, but the reversal of fortune this year reflects the major impact the decline in Chinese tourists have had on Taiwan’s domestic economy, and Travel Agent Association spokesman Ringo Lee does not see any end in sight.

Lee believes Taiwan will still draw more than 10 million overseas visitors in 2016, after Taiwan received a record 10,439,785 overseas visitors in 2015, but he doubted the milestone will be hit again in 2017. Consequently, he expected the run of bankruptcies seen in Taiwan’s tourism sector to continue.

The car market, which bolstered domestic demand this year, may not be as strong next year either, just another reason why there’s a lack of optimism.

NCU’s Hsu says car sales in 2016 were boosted by the introduction of the Commodity Tax Act, which allowed a subsidy of NT$50,000 to people trading in very old cars for new ones. The number of new license plates issued in Taiwan in the first 10 months of the year rose 4.46 percent from the same period a year earlier and rose 32.63 percent in the month of September alone, according to Ministry of Transportation and Communications statistics.

But Hsu believes this small surge in car sales has peaked and run its course and will probably not extend to next year.

While exports are slightly heating up and consumption is cooling, investment, which is so prized by Premier Lin Chuan, has shown few signs of vitality.  

Can 2017 Growth Break 2%?

The DGBAS has projected investment growth in 2017 at an anemic 1.88 percent, slightly below this year’s 1.92 percent. It sees private investment growth edging higher from 1.88 percent this year to 2 percent in 2017 but public investment growth tumbling from 2.36 percent to 1.19 percent.

National Development Council deputy chief Kung Ming-hsin declared recently that Taiwan will strive to achieve GDP growth of more than 2 percent in 2017, and a budget has seemingly been set for the “five plus two” innovative industries – green energy, smart machinery, biomedicine, national defense, and high-tech plus new agricultural technology and the circular economy – being championed by the government. Yet public and private investment growth have continued to slide. Why?

DGBAS chief Chu Tzer-ming says bluntly that it remains unclear how much the “five plus two” industries can contribute to Taiwan’s economy next year, describing this as just another level of economic uncertainty.

NCU’s Hsu notes that some of the “five plus two” industries are newly emerging sectors. The defense sector, for example, is not one of Taiwan’s strengths, and new agriculture and the circular economy are also relatively new to the country.

“So even if we start pouring resources into these sectors now, it will be hard to generate positive economic benefits in the short term,” Hsu says.

With the “five plus two” industries unlikely to provide a short-term catalyst for growth, Hsu believes fiscal policy needs to be used to stimulate the economy.

“The government needs to increase public spending to boost demand and make up for the downturn in visits by the Chinese,” contends Hsu, who is bullish on the potential of urban renewal projects and social housing in driving domestic demand. The Ministry of the Interior has estimates that social housing could generate NT$400 billion in economic activity over the next four years.

According to the NDC’s Kao, the government is expecting investment to once again become a key pillar of Taiwan’s economy through investment in four main areas – industrial innovation, led by the Internet of Things and smart machinery; an improvement in the quality of life through urban renewal and social housing; stable energy; and digital innovation.

The goal is to increase investment’s share of GDP within four years to 24 percent – its level 10 years ago – from the current 20.94 percent.

Risk and Opportunity

In the short term then, Taiwan’s economy will be primarily dependent on exports for growth, but with Donald Trump taking over as U.S. president next year and Europe due to hold several elections, protectionism could pose the biggest threat to Taiwan’s recovery.

Fubon’s Lo says that should protectionist instincts prevail, the most direct blow to Taiwan would be a decline in trade volume. Trump has branded China as a currency manipulator, and if in fact a trade war is unleashed between the world’s two biggest economies, the cost to Taiwanese businesses with factories in China would certainly carry over to Taiwan, he believes.

If Trump were to adopt protectionist policies, contract chip maker TSMC and other vendors might have to move production bases to the United States and make changes to operating models that carry significant costs.

But “having manufacturing move back to the United States would not necessarily be a bad thing for Taiwan,” Lo believes.

As the supply chain in China has become more localized, Taiwan’s traditional “triangular trade” role, in which it accepts orders, has the goods made in China and ships to a third country, is weakening and no longer generating the profits it once did, Lo says.

If overseas production actually moved back to the United States, Lo argues, Taiwan would have an opportunity to seize the role of helping American manufacturers with their purchasing in Asia and reposition itself in the global industrial chain, Lo argues.

If the U.S. puts up factories, Taiwan could help plan and build them and the equipment used, in effect evolving from its contract manufacturing role of the past into a manufacturing partner, Fubon’s chief economist says.

Making investment requires capital, which is why Lo also feels good about the prospects for the financial sector in this environment.

Chronic diseases cannot be cured overnight. If Taiwan is to escape “10 years of mediocrity,” 2017 will be crucial to its success.

Translated from the Chinese by Luke Sabatier