Taiwan GDP Growth in 3Q Attributed to Government Spending
Tue, April 20, 2021

Taiwan GDP Growth in 3Q Attributed to Government Spending

Taiwan’s gross domestic product was largely due to the country’s increase in government spending. / Photo by jy23 via 123rf

 

Taiwan’s gross domestic product grew 2.91 percent in the third quarter this year from the 2.40 percent year over year in the last quarter in financial comparison, reports economic and financial analysis platform ING Think. 

GDP growth and government spending

Iris Pang, an economist for Greater China, explains that their team in ING believes that the GDP growth was largely due to the country’s increase in government spending. This refers to the money spent by the public sector on the acquisition of goods as well as the provision of services, including defense, social protection, education, and healthcare. There are two primary sources of government spending: tax collections and government borrowing, differentiated by whether the money is from its citizens or foreigners.

Returning production lines helps

The ING team of economists and strategists studying the world of global markets added that Taiwan’s spending includes “subsidies to preferential investments” that prompted some manufacturers in the country to move their production to Taiwan from mainland China. Long Chen Paper Co., one of the biggest paper manufacturers in Taiwan, is an example of this. It is among the Taiwanese companies that have been affected by the trade war in mainland China, according to the South China Morning Post. Since Beijing has introduced restrictions on waste paper imports, which the company uses in its manufacturing process, they prefer to shift the bulk of their operation back home from mainland China to Taiwan.

The country’s administration has likewise estimated that the investment could reach TWD800 billion this year or around 4 percent of their nominal GDP. It is the GDP that is evaluated at current market prices, which includes changes in the market prices in the present year caused by deflation or inflation.

 

Taiwan’s spending includes “subsidies to preferential investments” that prompted some manufacturers in the country to move their production to Taiwan from mainland China. / Photo by Максим Кузубов via 123rf

 

However, some of the investments are only registered and there are factories that are “yet to be built,” noted Pang. She went on to say how other investors are finding it challenging to have adequate water supplies and electricity, the reason why such investment gains to Taiwan may not be quickly realized.

Strong net exports but may be temporary

Taiwan’s net exports, which is a measure of the country’s total trade, is also good. Both imports and exports grew by 2.17 percent and 4.23 percent YoY, respectively in the third quarter of 2019. This is way better compared to 3.68 percent and 4.13 percent in the second quarter. Yet, the strong boost in their net exports may only be temporary. The ING economists cited how smartphone sales in the country were not as good as they expected it to be after the initial orders. As a country that relies much on Apple gadgets, it may be directly affected both in exports and production. This is why economists predicted that Taiwan’s export contribution growth will subside in the fourth quarter.

Consumption is one important economic indicator and is a measure of national consumer spending. It means the value of services and goods bought by people in the country. This is also usually the biggest GDP component. Consumption may be classified according to needs as follows: food, clothing and footwear, energy and heating, housing, transport, health, house furniture and appliances, culture and schooling, communication, and entertainment. Taiwan’s consumption grew by 1.48 percent YoY in the third quarter this year. The reason for such growth, however, was because of a low base effect in 2018. The low base effect means the tendency of a small change from a low initial amount that was translated only into a large change of percentage.

The economists believe that if the salaries of people in Taiwan stagnate, there won’t be much consumption gain, and the same will happen should smartphone production and trade activities also slow.

 

 

General government spending

The general government spending indicates the size of the government of a country and highlights the government’s methods of delivering public goods and services. Intergovernmental economic group The Organisation for Economic Co-operation and Development highlighted these countries with the highest general government spending in terms of thousand USD per capita and as their GDP percentage in 2015: France (56.8 percent GDP), Finland (56.6 percent), Denmark (54.5 percent), Belgium (53.7 percent), and Greece (56.5 percent).

Meanwhile, Taiwan’s GDP in 2015 was worth 525.6 billion in US dollars, 531.36 billion in 2016, 574.9 billion in 2017 and 589.39 billion in 2018. Pang and the team’s forecast of Taiwan’s GDP growth in the fourth quarter this year will be at 2.8 percent YoY attributed to the low base effect in 2018. A strong Taiwan dollar is also expected because of the country’s stock market and the capital inflows from various investments. A strong dollar means expensive exports as foreign purchases will have to pay more for the goods.

While Taiwan’s economy shows signs of improvement, particularly in exports, it remains a question of how long it will last. The ongoing US-China trade war and the slow demand for smartphones may slow down the GDP growth.