Perspectives from Around the World 156

# Impact of Covid-19 on Taiwan’s Economy and Industry

Chien-Yi CHANG
President, Taiwan Institute of Economic Research

The Wuhan pneumonia, better known as COVID-19, has had a huge impact on the global economy. According to the recent World Economic Outlook on April 14, 2020 by the International Monetary Fund (IMF), due to the impact of the pandemic, the global economic growth rate is expected to contract by 3 percent in 2020, which is much lower than the -0.7% experienced during the financial crisis in 2008-2009. The global economy is expected to face the worst economic recession since the great depression of 1929. Nevertheless, if the pandemic could be contained during the second half of 2020 and respective prevention measures are gradually removed, the global economic growth rate in 2021 could possibly reach 5.8 percent with returning economic activities. If the pandemic is prolonged, then emerging and developing economies would be hit hardest, while the financial situation would be tightened and eventually the global economic growth rate would fall far below the current estimated figure. The Asian region is expected to attain zero growth rate in 2020 and would mark its first period of stagnation in 60 years, which is mainly caused by the severe negative impact of COVID-19 in the region's service industry. In addition, the economic performance of the export-oriented Asian countries would also be affected due to the sharp decline in the demand from the European and American market.

In view of the rapid spread of the pandemic in the global market, Taiwan, being a small open economy, attaches strong impact of any changing global economic development to its economy and industry. The Taiwan Economic Research Institute (TIER), understanding that the effects of the pandemic could vary depending on the specific path of COVID-19 development, developed a variety of different projections for Taiwan's economic and industrial development. Accordingly, TIER predicts that if the outbreak can be contained by the end of June this year, and using the impact on consumption as the only factor for consideration, the impact on Taiwan's overall GDP should amount to -0.39%; whereas, the impact on the manufacturing and service industry is -0.08% and -0.5% of their GDP respectively. With regard to the impact on the manufacturing sector, GDP in the pharmaceutical and medical chemicals industry, on the contrary, is anticipated to increase by 0.19%. In addition, TIER expects a slight decline in the GDP of other sectors that include semiconductors, optoelectronic materials and components, and textiles.

If the external shocks of consumption and exports are both taken into consideration, then the overall impact on Taiwan's GDP would amount to -0.65%, while the impact of manufacturing and services GDP would amount to -0.8% and -0.6%, respectively. It can be seen from this that the severe pandemic effects in Europe and the United States have led to weak consumption, which could in turn affect exports and further impact Taiwan's GDP growth. Among the export-oriented semiconductor and optoelectronic materials industries, the GDP of the two major industries would both see an impact of -0.8%, while travel and its related services industry would fall tremendously by 17%, air transportation and accommodation by more than 9%, and the catering industry would also experience a decline of 2.19% throughout the year.

If the COVID-19 outbreak can be controlled by mid-September of this year, and considering only the impact of Taiwan's consumption, the impact on Taiwan's overall GDP would be a reduction of 0.78%, while that on the manufacturing and service industry would be -0.15% and -1.04 %. Among these, in terms of the impact of the manufacturing sector, the GDP of Taiwan's pharmaceutical and medical chemical industry, the two main contributing sectors, are set to actually increase by 0.25%. Furthermore, for other semiconductors, optoelectronic materials and components, and textile-related industries, a slight recession is expected. As for the GDP impact on sub-category industries of the service sector, specifically air transportation, accommodation, travel and related service industries are set to decline by more than 20%, and even by more than 30%.

On the other hand, if the external shocks of Taiwan's consumption and exports are also included, overall, the negative impact on Taiwan's GDP will be greatly increased to 1.53%. The GDP impacts on manufacturing and services sectors stand at -2.21% and -1.29% respectively. As for the GDP impact on other sub-sectors, namely, export-oriented semiconductor and optoelectronic materials industries, the GDP of these two major industries would face a reduction of around 2%. With respect to the service sector, negative impacts in the air transportation, accommodation, travel, and related service industries could amount to more than 20% or even more than 30%.

Quite recently, the International Monetary Fund (IMF) released its "World Economic Outlook" report and revised Taiwan's GDP outlook from 2 % growth in October, 2019, to -4% in 2020. The significant slowdown in Taiwan's GDP growth anticipated by the IMF in turn caused quite a stir in Taiwan. TIER urges that the IMF's anticipated negative growth rate is flawed. In view of the fact that the IMF does not maintain a full-time supporting department that relates to analytical work on Taiwan's economy, the IMF possesses an inadequate understanding of Taiwan's actual economic situation which resulted in a misleading growth figure.

From TIER's point of view, it is predicted that most countries should achieve a U-shaped recovery, whereas for Taiwan, it would most likely be somewhere between a V-shaped and an U-shaped recovery. Mainly thanks to Taiwan's low infection rate and the fact that its government did not announce any lockdown measures for the country, the continuing economic activities helped mitigate most of the potential negative effects. Most importantly, it is perceived that with this pandemic, Taiwan will be able to regain some ofits position as a stable partner within the international supply chain, as in the past, Taiwan's role as a major producer of various products was transferred to China due to comparative advantages. Hence, it is quite possible that major global companies will once again seek Taiwan's help in the latter half of the year and this would certainly provide a boost to Taiwan's export performance. In fact, Taiwan's most important semiconductor company, TSMC, unexpectedly registered profits during the first quarter of this year, and furthermore, TSMC maintained its annual capital expenditure figure, at US$15-16 billion, accounting for 13% of Taiwan's total private investments, and output that accounts for 6% of Taiwan's GDP. In this context, the semiconductor industry is perceived to be an important pillar of Taiwan's economy in 2020. Exports in semiconductor-related products have contributed to 30% of total exports and 14% of Taiwan's GDP. Based on the results of the above scenario simulation and in addition to approving a NT$210 billion (subject to a further expansion of NT\$ 210 billion) industry relief package from the government, TIER predicts that Taiwan will achieve 1.58 percent GDP growth in 2020 (revised from the previous forecast of 1.09 percent). The GDP growth forecast for each of the four quarters in 2020 respectively stands at 2 percent for Q1, 0.3 percent for Q2, 1.56 percent for Q3 and 2.24 percent for Q4. However, if the pandemic outbreak can be fully contained sooner than expected, Taiwan could most likely expect even greater economic growth than these figures.

All in all, the economic development strategy outlined by the government under President Tsai Yin-wen since it gained power in 2016 has been to focus on improving Taiwan's domestic economy and boosting domestic consumption. This change of economic structure has helped to offset negative global trade impacts of the current COVID-19 crisis on Taiwan's economy.

This article was written on April 27, 2020

May 22, 2020

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• ### Impact of Covid-19 on Taiwan’s Economy and Industry

May 22, 2020［Perspectives from Around the World］