Taiwan's export growth pegged to dip 0.8%

Here's why the outlook remains challenging.

According to DBS, Taiwan’s external trade data for May (due today) will likely show export growth has stayed slightly negative at -0.8% YoY.

Here's more:

The outlook for export demand remains challenging. Manufacturing PMIslipped below 50 in May in both China and the US – Taiwan’s two largest export markets. The US fiscalspending cuts have just begun.

On the other hand, China’s new administration isin no hurry to boostthe country’s growth momentum. PMI in Taiwan has also fallen below 50 last month and industrial production has deteriorated.

The 2Q GDP growth will be worse than expected, due to weak export demand and inventory destocking. That said, we still expect domestic demand to pick up laterthis year and provide some supportto headline growth.

Thanks to lower commodity prices in the international markets, CPI inflation has eased rapidly to 0.7% YoY in May from 1.0% in April and 1.8% in 1Q. The slowdown of energy inflation will improve households’real incomes and real purchasing power.

Although an electricity price hike of 10% isslated in October, we think the government has sufficient leeway to postpone the price hike. Given that the public debt ratio remains lower than the legal limit of 40% and most ofthe debt is financed domestically, there is no urgency to push for aggressive fiscal consolidation in the shortterm.

In addition, the government recently has proposed to revise the capital gains tax bill, exempting individual stock market investors from paying the tax. If approved, this should also help consumer sentiment in the near term.