EFTA00605848.pdf

J.P. Morgan Asia Pacific Economic Research Taiwan: 2Q GDP weakened notably, main drag coming from the export sector, especially tech Taiwan's 2Q15 real GDP growth slowed notably to 0.52%oya (compared to the advanced reading of 0.64%), following the upwardly-revised growth at 3.84%oya in 1Q (previously: 3.37%). The Directorate General of Budget, Accounting and Statistics (DGBAS) estimates that, seasonally- adjusted, real GDP contracted 6.56% q/q, saar in 2Q15, following the positive growth at 2.3% q/q saar in IQ. Breakdown of 2Q GDP by expenditure highlights that the notable contraction in the economy (in %q/q saar terms) was mainly dragged by export sector weakness (especially for tech products). On the domestic front, GDP expenditure data showed decent growth in private consumption in 2Q, though GDP industry data suggested that consumption-related sectors, such as wholesale and retail trade, remained subdued. Meanwhile, fixed investment growth rebounded decently in 2Q, which may hint at some potential moderate recovery for the economy going into 2H15. Watching for signs of 21115 improvement in external demand The significant weakness in Taiwan's 2Q GDP, with the most severe quarterly GDP contraction (in Voq/q saar terms) since the worst moments of the global financial crisis, was mainly dragged by the export and manufacturing sectors, with the notable underperformance of the tech sector (tech IP fell significantly at 34.5% 3m/3m saar in June). Looking ahead, on the external front, our global team continues to expect stronger global growth in 2H15, which will hopefully provide some support for moderate recovery in Taiwan's export and manufacturing sector. In this regards, it is with noting: (1) Taiwan's July exports improved moderately (up 3.2% m/m sa in real terms); (2) tech exports, following the significant weakness in 2Q, rebounded 7.7% m/m sa in July; (3) capital goods imports rose notably at 93.6% m/m sa and 13.2% m/m sa in July and June respectively, suggesting decent expansion in corporate capex, which in turn hints at some moderate recovery in export and manufacturing sectors in coming months. On the domestic front, it is worth noting that the slowing in industrial activity through 2Q seemed to have gradually fed into the labor market, with employment growth losing momentum lately (in % m/m sa terms, total employment stopped growing in June), which could restrain private consumption outlook going into 2H15. Overall, our forecast for Taiwan's full-year 2015 GDP growth now stands at 1.3%oya, assuming moderate recovery in the sequential growth trend to average at about 3.0% q/q saar in 3Q and 4Q. Meanwhile, regarding monetary policy, considering the notable weakness in latest macro data, the possibility of a potential policy rate cut, sometime during 2H 15, seems to be on the rise. Besides, as the major source of recent macro weakness largely originated from the external sector, managing currency competitiveness would be an important policy tool going ahead. This document is being provided for the exclusive use of & clients of J.P. Morgan. EFTA00605848 For further details of the 2Q GDP report, looking at the major GDP expenditure components: • Total exports of goods and services contracted notably by 16.5% q/q saar in 2Q, compared to the modest expansion at 1.7% q/q saar in IQ. (In particular, monthly trade data suggested the tech sector was the main drag on 2Q export weakness, as tech exports contracted 27.0% 3m/3m saar in June.) • Imports of goods and services expanded moderately at 3.0% q/q saar in 2Q, following the contraction at 5.5% q/q saar in IQ (reflecting the notable rebound in 2Q domestic fixed investment). • On the domestic front, private consumption expenditure rose 3.0% q/q saar in 2Q, following the solid gain at 4.1% q/q saar in 1Q. • Gross fixed capital formation rebounded rather notably by 26.8% q/q saar in 2Q, following the contraction at 13.1% q/q saar in 1Q. Regarding GDP details by industry: • Manufacturing production contracted 13.4% q/q saar in 2Q, following the moderate gain at 2.2% q/q saar in IQ. • With regard to domestic service sectors, wholesales and retail trade, which is closely related to private consumption expenditure, contracted 5.1% q/q saar in 2Q, following the decline at 3.4% q/q saar in IQ. • Real estate activity rose modestly at 1.2% q/q saar in 2Q, following the modest gain at 0.5% q/q saar in 1Q. • Finance and insurance services expanded significantly at 12.9% q/q saar in 2Q, adding to the gain at 17.6% q/q saar in IQ. • In addition, construction activity contracted 5.3% q/q saar in 2Q, adding to the decline at 4.2% q/q saar in IQ. Taiwan: real GDP growth 2014 3014 4Q14 1Q15 2Q15 %oya Real GDP 3.8 4.3 3.5 3.8 0.5 Private ccasumptien 3.0 18 2.4 3.8 2.9 Government consumption 3.7 19 4.3 3.9 0.0 Gross capital formation 1.8 4.8 0.0 -0.2 1.3 Exports of goods 8 serv. 5.9 7.6 6.5 6.1 -1.3 Imports of goods 8 serv. 5.8 9.2 6.1 2.7 2.2 %a, sear Real GDP 6.1 1.9 2.3 4.6 Private ccasumptico 25 2.0 4.1 3.0 Government consumption 4.6 1.3 -9.8 5.7 Gross tacit' formation 16.6 -3.5 -13.1 26.8 Efforts of goods 8 serv. 9.2 4.4 1.7 -16.5 Imports of goods 8 sew. 9.7 2.8 -5.5 3.0 Source: DGBAS This document is being provided for the exclusive use of & clients of J.P. Morgan. EFTA00605849 Mini: real GDP growth %change 15 10 5 0 5 10 10 11 Source: DGBAS %oya %Ohl. Saar 12 13 14 15 16 Taiwan: contribution to GDP growth %.pt contribution to headline GOP oya growth Net exports 3 Private consumption Source: DGBAS Taiwan: GDP by industry Index. 102008 = 100 140 130 - 120 110 100 - 06 09 10 Source DGBAS, Taiwan: real GDP and IP %40 saw. both scales 15 10 5 0 4 10 2012 2013 2014 2015 Manufacturing Accomodatlon and food servi5es Real estate • — 20 15 10 S 0 5 -10 15 This document is being provided for the exclusive use of & clients of J.P. Morgan. EFTA00605850 Source: DCiBAS, MoEA. Global manufacturing Phil and Taiwan real export growth Index. sa 50 54 54 52 50 48 Global manufacturing Pill output 2013 2014 2015 2011 2012 Source: MoF, DGBAS, Mark3:. Taiwan export volume (adjusted by export prices) Taiwan: tech exports and capital goods imports %3mit3rn saar 30 20 10 0 .10 - •20 -30 Tech exports Capital goods imports (leading by 6•months) • 2013 2014 2015 2016 Source: MoF. Taiwan: real labor income and private consumption %oya Real private consumption 5 expenditure Real labor Income 2011 2012 2013 2014 2015 Source: DGBAS. Grace N JPMorgan Chase Bank, N.A., Hong Kong JPMorgan Chase Bank, N.A., Hong Kong saar 100 75 50 25 0 -25 50 60 40 20 0 -20 -40 This document is being provided for the exclusive use of & clients of J.P. Morgan. EFTA00605851 Analyst certification: I certify that: (I) all of the views expressed in this research accurately reflect my personal views about any and all of the subject securities or issuers; and (2) no part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed herein. Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan-covered companies by visiting I [. calling I-800-4774406, or e- mailing I with your request. J.P. 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