Taiwan's GDP pegged to hit 2.6%

Recovery to be delayed to 2014.

According to DBS, its GDP forecast for 2013 has been lowered further to 2.6% from 3.3%. The 2Q growth appears weaker than expected. Export growth slipped in April May, PMI dropped below 50. 

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Industrial production fell in April and the rise in inventory-to-shipment ratio suggests that destocking pressures will remain in the near term.

While a substantial economic recovery will be delayed to 2014 (forecast: 4.2%), we have not abandoned the view that growth will improve in 2H13.

Technically, the contribution of net exportsto GDP growth should turn positive, as imports growth has retreated thanksto the moderation in capital goods demand and the fall in commodity prices.

Meanwhile, consumption growth should be helped by the recent easing of energy price inflation and the improvement in real household incomes. 

The government’slatest proposal of revising the capital gainstax billshould also lift public sentiment. On monetary policy, we think the probability ofrate cutsislowerthan 50%.

The overnightinterbank rate currently stands at only 0.39%, and the inflation-adjusted short-term realratesremain negative (CPI: 0.9% in Apr May). 

Meanwhile, property prices have continued to rise strongly, despite the centralbank’s attempt to cool prices via mortgage lending controls. The central bank has to be wary ofthe side-effects of lower interest rates on asset prices.

We expect the CBC to hold the policy discount rate steady at 1.875% when they meet on June 27.