GDP: Keeping Our Below-Consensus Forecast for Now
May 24, 2010
By Sharon Lam & Jason Liu | Hong Kong
Taiwan reported 1Q10 GDP at +13.3%Y, which beat our and consensus expectations (Morgan Stanley: +10.9%, consensus: +11%). This is the strongest growth since 1978. Yet, this year-on-year growth rate should not be a surprise due to the extremely low base from last year, when Taiwan experienced its sharpest recession ever. In terms of sequential growth, 1Q grew +2.7%Q seasonally adjusted, which is a slowdown from +3.9% in 4Q09. Having said that, sequential growth of 2.7% (i.e., +11.3% annualized) is impressive and evidence that Taiwan's growth has extended beyond the global restocking theme from last year.
Given the higher-than-expected 1Q data, our +4.5% 2010 GDP forecast looks too conservative. However, we will wait for external uncertainties to clear before we reassess Taiwan's economic outlook this year. We change our interest rate forecast to a 12.5bp hike in 4Q10 and 50bp hike in 2011.
A brief glance at the breakdown:
Private consumption - disappointed slightly: 1Q10 growth was +3%, which is lower than +5.8% in 4Q. We believe that the main cause was slower auto sales in 1Q compared to 4Q as tax incentives expired last year. Also, 1Q09 was artificially lifted by government-distributed shopping coupons to each resident. We expect the growth rate to continue to normalize this year as the stimulus effect fades, but we expect Taiwan's domestic consumption to hold up relatively well this year due to the structural improvement in consumer confidence, which is at a six-year high now.
Taiwan's consumer confidence does not flow with GDP growth, but rather with the political environment, in our view. As we continue to see improving ties between Taiwan and Mainland China, Taiwan's consumer confidence is likely to be solid despite rising external uncertainties
Capex - stronger than expected: Private sector capex in 1Q10 was +37.1%Y, compared to +13.2% in 4Q. Although the base in 1Q09 was very low, this growth rate still surprised on the upside. Investment was concentrated in factory equipment and machinery expansion, whereas spending on transportation equipment actually slowed. Looking to the next two quarters, it is possible that capex growth will slow as external uncertainties rise but, given the very low base from last year, capex growth in Taiwan should remain positive throughout the year.
Restocking - in line and not excessive: Inventory growth turned positive for the first time in a year and accounted for 1.2% of GDP in 1Q10. However, we do not think that Taiwan's restocking is aggressive, considering that the inventory accumulation in 1Q10 was only 40% of the inventory cut in 1Q09. As a result, we believe that the capex and restocking trend in post-recession Taiwan has been rather disciplined so far.
External trade - in line: It is no surprise that trade growth jumped in 1Q10 as compared to last year when it collapsed. Exports increased by 42.2%Y in 1Q10; imports by 49.4%Y. Exports are unlikely to be sustained at such a high growth rate as the base effect fades. The outlook of the European economy will certainly play an important role in Taiwan's export growth, but it is important to point out that Europe now accounts for only 11% of Taiwan's export shipments. Demand from Mainland China is much more significant, representing 41% of Taiwan's exports.
Bottom line: The government forecasts 2010 GDP growth of +6.1%. Given the higher-than-expected 1Q data, our +4.5% GDP forecast looks too conservative. However, we will wait for external uncertainties to clear before we reassess Taiwan's economic outlook this year. In fact, when we made our 2010 forecast last year, we put Taiwan's GDP growth below consensus because we believed that the strong growth rate could not be extrapolated without more positive catalysts this year.
We change our interest rate forecast to a 12.5bp hike in 4Q10 and 50bp hike in 2011 (we had previously expected a first hike of 12.5bp in 2Q10, and a total of 50bp in 2010) as we believe that Taiwan is likely to follow either Chinese or US interest rate movements (Morgan Stanley forecasts rate hikes to be delayed in both China and US due to the external uncertainties). Liquidity remains excessively abundant in Taiwan, and so asset prices will likely continue to be supported unless we see another global credit crunch.
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CNB: Steady As She Goes (Prague Trip Notes, May 14, 2010)
May 24, 2010
By Pasquale Diana | London
Steady as she goes, no rate increases for some time: While we had anticipated the May rate cut, we still found the overall tone of the meetings we had quite dovish. As a result, we no longer think that the CNB is likely to deliver 50bp of rate increases later this year. More likely, the Czech central bank will stay on hold well into 2011. As expected, the lower EURIBOR assumption played a role in explaining the new (lower) PRIBOR rate trajectory and the rate cut decision. The vote was close (4-2, would have likely been 4-3 if all members had been present), but ultimately the majority on the board chose to remain true to their inflation-targeting mandate: with the new forecast showing headline inflation (just) below the 2% target at the policy horizon and the implied rate profile suggesting near-term declines in local rates, it would have been hard for the CNB not to cut rates. As we stressed many times, there is probably no other institution in CEE that relies so heavily on its staff projection for inflation and GDP in determining rate decisions. Therefore, meetings which coincide with revisions of the inflation forecast always bear close watching.
Could the CNB cut again? We would not rule out another cut in the coming months. Our sense is that the central bank does not feel that it faces a negative differential with ECB rates; instead, it points to a still positive differential with EONIA rates as a sign that possibly there is still some limited room for manoeuvre. What may trigger another cut? It is pretty hard for the CNB to be disappointed by the GDP outlook, given that its expectations are already quite low (more on this below). In all likelihood, it would be the exchange rate. The current assumption sees EUR/CZK headed to 24.9 next year (i.e., some appreciation from here). The current macro backdrop shows growth being led by IP and exports, and inflation not really an issue: therefore, the CNB's preference for a stable CZK is as clear as ever. This is certainly not the way the market is trading at present, but should appreciation pressures on CZK resume, we believe that a rate cut would come back strongly on the agenda.
Growth outlook subdued, says the CNB: The preliminary 1Q GDP data were softer than the CNB expected (1.2%Y versus 1.8%Y). As such, they will have probably reinforced the CNB's bearish stance on growth (1.4% in 2010 and 1.8% in 2011 - well below potential). However, we note that the CNB continues to expect a double-dip ahead, with growth heading back to zero in quarter-on-quarter terms at around mid-year. Even the recent gains in IP growth are not sustainable, says the CNB, as they are probably due to restocking and base effects. Indeed, despite the healthy gains in year-on-year rates, the bank notes overall subdued activity levels. And looking at how far auto output has run in recent months despite the fall in German auto sales, we are inclined to agree that there is restocking at play here, but that ultimately production growth will slow in sequential terms later in the year, as final demand is quite weak. Overall, the bank's growth view looks reasonable, but we feel that it will be difficult for growth to continue to surprise such low expectations on the downside. That is why we think that, if another rate cut will come, it will be because of CZK, not activity.
Can the CNB do QE? Recent ECB action makes any criticism of any similar move by the CNB (say, purchases of Czech bonds on the secondary market) irrelevant. Therefore, the chances of such a move are much higher today than just a few weeks ago, we think, though the CNB would probably choose to cut rates further before it purchases bonds. Also, we would not rule out outright FX intervention, if rate policy is unsuccessful in capping any eventual CZK gains.
Risk to long-term rates; EMU very far away, still: We found broad-based agreement with our euro area colleagues' view that the implicit transfer of risk from the periphery of the euro area to its core (Germany) ultimately implies higher Bund yields, which is viewed as a risk for CEE and Czech long-term yields too. Coupled with the higher probability of anchored short-term rates, this suggests further scope for the curve to steepen. On the EMU front, our sense from the meetings is that the current troubles within the euro area highlight the risk of a multi-year delay, rather than just a few years (we agree entirely). The Czech authorities were never that keen to adopt the euro until the time is right, and instead have seemed to value the flexibility that a floating currency can offer at times of stress - this was abundantly clear in late 2008/early 2009, when the Czech Republic gained a great deal of competitiveness vis-à-vis Slovakia. Interestingly, the population seems to have become less keen also: the latest poll shows overall support for euro entry at 38% this year, down from 44% in 2009 and 52% back in 2001.
Upcoming elections - risk of a hung parliament is very high: The parliamentary elections that will take place on May 28-29 are the next key risk event. The Czech Republic operates on a pure PR system, with a 5% threshold. The political scene is quite fragmented, and coalition-building will likely be a real challenge. At present, the Social Democrats (CSSD) are ahead in the polls, with around 25-30% of the votes. Centre-right ODS is polling at around 19%, and declining. Two smaller parties (TOP 09 and VV, both closer to ODS than CSSD) are at around 9% each. Finally, the Communists (KSCM) are polling at around 12%. The Social Democrats will probably have the chance to form a coalition, either with external support of the KSCM, or in a more formal alliance with TOP 09 and VV. Another option is for the CSSD and ODS to form a ‘grand coalition'. Locals think that a clear-cut result and a majority are quite unlikely, so a long period of horse-trading following the elections could lie ahead (possibly until the October local elections). This points to a high risk of policy paralysis. The fiscal situation is definitely not dire, with deficit/GDP at 5.5% this year and debt/GDP at 39.6%. That said, the debt dynamics are worrying in the medium term, especially as the Czech Republic is the only CE4 country that has not approved pension reform yet (although the retirement age was increased in 2008).
Conclusion: Lower Rate Profile Ahead
We no longer feel that the CNB will be in a position to hike rates this year, especially in light of our recently revised ECB view (see ECB Watch: The Calm in the Eye of the Storm, May 6, 2010). We maintain that rate increases will take place next year, as the recovery takes hold properly and the CNB moves away from its extraordinary accommodative stance. Overall, we mark-to-market our rate profile to reflect the new reality of lower core European rates for longer, and see no rate hikes this year, and 75bp of hikes in 2011.
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