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Cathay Financial cuts Taiwan's 2023 GDP growth forecast to below 2%

04/01/2023 08:52 PM
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Taipei, April 1 (CNA) Cathay Financial Holding Co., one of the largest financial holding firms in Taiwan, has cut its forecast for Taiwan's gross domestic product (GDP) growth in 2023 to below 2 percent, citing a fall in exports.

In its latest economic climate report released earlier this week, Cathay Financial also raised its forecast for consumer price index (CPI) growth in Taiwan to 2 percent for 2023.

Cathay Financial expects the local economy to grow 1.8 percent in 2023, a downgrade from its earlier forecast of 2.3 percent made in December 2022, after exports weakened in the first half of this year due to inventory adjustments amid falling global demand, which prompted many companies to scale back investments.

The silver lining is that domestic consumption is expected to lend some support to economic growth, while China, the second largest economy in the world, is likely to stage a rebound amid eased COVID-19 controls, which could pave the way for a cyclical uptrend for the electronics industry in the second half of this year, Cathay Financial said.

Based on the forecast, Cathay Financial was more downbeat than the government, with the Directorate General of Budget, Accounting and Statistics (DGBAS) anticipating 2023 GDP growth of 2.12 percent. In addition, the financial holding firm was also more cautious than the central bank, which has estimated the economy will grow 2.21 percent.

Cathay Financial said after taking into account an average 11 percent hike in electricity tariffs, effective from April, and an increase in dining out costs and rents, which will boost core CPI, excluding fruit, vegetables and energy, the company raised its CPI growth forecast from 1.7 percent to 2 percent, the inflation alert set by the central bank.

The DGBAS has forecast CPI will grow 2.16 percent in 2023, with the central bank anticipating a 2.09 percent increase in both CPI and core CPI growth for 2023.

Based on the financial firm's latest estimate, National Central University economist Hsu Chih-chiang (徐之強), who led the Cathay Financial research team that compiled the forecast, said Taiwan is expected to see its CPI growth beat GDP growth for the second consecutive year in 2023, adding that the local economy remains in "stagflation" mode.

Cathay Financial said although the central bank raised its key interest rates by 12.5 basis points in its quarterly policymaking meeting in March to combat inflation, the bank is likely to raise interest rates one more time in the second or third quarter as upward pressure on core CPI remains high.

Cathay Financial added that as local interest rates are relatively low compared with those in other countries, it is unlikely the central bank will cut interest rates by the end of this year despite the weaker economic growth.

Since March 2022, the Taiwan central bank has raised its rates by 75 basis points, while the U.S. Federal Reserve has boosted its rates by 475 basis points, and the slower pace adopted by the local central has widened the interest rate gap between the two countries.

Cathay Financial warned that the aggressive rate hike cycle launched by the major central banks in the world is expected to boost the chance of a recession in the United States and Europe.

In addition, global demand could stay weak, prolonging inventory adjustments and affecting investments, while lingering geopolitical risks, such as the Russia-Ukraine war and escalating tensions between the U.S. and China, will create uncertainty over the global economy, Cathay Financial said.

However, Cathay Financial said the rising popularity of artificial intelligence could lead the global tech industry to pour funds into the area and speed up industrial transformation.

(By Hsieh Fang-yu and Frances Huang)

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