Taiwan analysts lift 2007 forecasts after GDP data

Aug 24, 2007 - Taiwan's stronger-than-expected second-quarter economic growth has prompted some economists to raise their full-year forecasts, but others prefer to wait and see what fallout there might be from U.S. financial strains.

Five out of nine analysts, including DBS and KGI Securities, have either raised or plan to lift their forecast for this year's gross domestic product growth to reflect stronger capital spending by the private sector and recovering domestic demand.

Citigroup and Credit Suisse have made no changes, while JPMorgan and Forecast have lowered their forecasts, anticipating that softer U.S. domestic consumption due to the subprime mortgage crisis may hit Taiwan's exports, a key driver of growth.

"Taiwan's investments should register good growth in the second half of the year after rebounding strongly in the second quarter," said Ma Tieying, an economist at DBS in Singapore.

"In general, Taiwan's exports performance should still be quite stable. Although there are some worries over U.S. demand, China's growth is very robust," she said on Friday.

Taiwan's economy expanded by 5.07 percent in the second quarter from a year earlier, the fastest pace in 1-½ years, prompting the government on Thursday to lift its 2007 growth forecast to 4.58 percent from 4.38 percent.

Private investment was the main engine of growth, underlined by a turnaround in machinery imports.

These were up 5.2 percent in the second quarter from a year earlier, after dropping 5.4 percent in the first three months.

The government responded by raising its 2007 forecast for private investment growth to 5.7 percent from 1.7 percent.

Analysts said the upgrade was justified even if the new projection might be a tad optimistic.

"I don't read the Q2 number as meaning growth is on a faster recovery. Part of it is because Q2 is a little bit distorted by some investment spending being deferred from the first quarter," said Joseph Lau, an economist at Credit Suisse.

Lau is keeping his forecast for Taiwan's GDP growth intact at 4.5 percent for 2007, although he said he might nudge it up to 4.6-4.8 percent in future.

A major uncertainty is the fallout from an unfurling wave of defaults in the U.S. mortgage market, which has gummed up other parts of the credit market and prompted the Federal Reserve to cut its primary discount rate to try to restore liquidity.

"The risk has risen somewhat that external demand going into Q4 may be clouded by the spillover effect of the U.S. subprime market problem and credit tightening on real economic activities," said Grace Ng, an economist from JPMorgan, which has cut its 2007 GDP growth forecast to 4.5 percent from 4.7 percent.