Sharp Export Growth Driven by China-Led Demand

Exports recorded a sharp turnaround in the three months through December, fuelled by strengthening China-led regional trade flows as well as surprisingly strong tourism growth. Exports of goods and services surged 19.1% y/y in the December quarter, marking the biggest expansion since the second quarter of 2004. It also sharply reversed an 8.4% decline in the September quarter. In q/q annualised terms, total exports advanced 26.7% after rising by an already strong 35.6% in the previous quarter. Warmer relations with China have helped to lift business activities across the two sides, while boosted by a 170% surge in Chinese tourist arrivals and a 22.2% increased tourism revenue. The island also benefited from strengthening Chinese demand boosted by the Beijing authorities' massive fiscal stimulus. Strong Chinese recovery has also helped spur Asian trade flows and counterbalance still-sluggish demand from Western markets. Concurrently, imports climbed 14.5% y/y in the December quarter, reversing a 12.3% decline in the previous quarter. The rebound in imports reflects recovering domestic demand and higher commodity prices. Net exports contributed 4.7 percentage points to GDP growth in the December quarter.

Unexpectedly Strong Domestic Demand

Domestic demand returned to growth for the first time in seven quarters, prompted by abundant liquidity and the government's stimulus measures. Private consumption rose by a sharp 6.3% y/y in the December quarter, strengthening from the 2.3% increase in the previous quarter. The rate of gain was also the strongest since the second quarter of 2004. Record low interest rates have pumped ample liquidity into the local markets and helped the surge in asset prices. The positive wealth effect, coupled with a reduction in certain commodity taxes including those on automobiles, has prompted a strong rebound in consumer spending. Concurrently, business spending resumed growth in the December quarter, as business sentiment was lifted by rising export orders, abundant liquidity, warming cross-Strait relations, and a low base effect. Nevertheless, uncertainty over a global recovery has kept businesses cautious to some degree. Total gross fixed-capital formation rose 11.1% y/y in the three months through December, reversing a 5.2% fall in the previous quarter. With fiscal stimulus continuing to come on-stream, the gain was led by a 23% expansion in investment by public enterprises and a 14% increase in government investment. Concurrently, private investment rose for the first time since the first quarter of 2008, by 8.2%, after falling 12% in the third quarter.

Outlook and Implications