Boston, MA -- (SBWire) -- 12/19/2013 --The underperformance in Taiwan's real GDP growth in Q313 fell in line with our expectations. Despite this, we remain constructive towards the island's economic growth prospects through the rest of 2013 on the back of the recent bounce in China's economy. Our expectations, however, do not extend into 2014 as we expect sup -portive pressure from the tech sector and Chinese demand to wane as the year progresses. Additionally, we highlight two factors - the structural rebalancing of China's economy and increasing incidence of political deadlock in Taiwan - which we believe will hurt its economy in the long run.
Inflation has remained relatively benign through 2013 and we expect this to remain the case in the quarters ahead. With the recent pickup in trade activity having proved transient, we expect the central bank to keep monetary conditions supportive of growth. Consequently, despite suggestions that monetary authorities may tighten policy at its final policy review at the end of 2013, we do not foresee any interest rate hikes. We expect the benchmark interest rate to be kept at 1.875% for the rest of the year and project a single 12.5 basis points hike in 2014.
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We are becoming increasingly concerned with the need for fiscal consolidation within the country. The pace of reforms of the country's energy and pension policies has been sluggish, at best and Taipei had to dial down the scale of a planned hike in electricity tariffs in October. Given that the lack of political leadership has become increasingly apparent, it remains to be seen if Taipei will be able to push through with the painful reforms that are needed to secure the country's fiscal well-being and structural growth prospects.
President Ma Ying-jeou's administration continues to be undermined by the country's subpar economic growth and constant political infight -ing. At the root of the problem lies Ma's lack of political leadership and, at times, indecisiveness, particularly in regards to policymak -ing decisions. We caution that the widening political divide, if left unmended, will eventually hurt the progress of cross-strait relations, which will in turn impinge on Taiwan's structural growth prospects.
Given the increasingly fractious political environment on the island, we do not expect to see much development in cross-strait economic and political relations in the coming years, at least until greater certainty about the country's political leadership can be established.
Major Forecast changes
We have consequently downgraded our 2013 and 2014 real GDP projections from 3.0% and 4.0% to 2.1% and 3.0%, respectively.
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Now Available: Taiwan Business Forecast Report Q1 2014
Fast Market Research recommends "Taiwan Business Forecast Report Q1 2014" from Business Monitor International, now available