Cathay Financial Holding Co (國泰金控) on Friday raised its GDP growth forecast for the nation this year, but warned of slower growth next year with a risk of stagflation.
The firm revised up its growth forecast to 2.8 percent, from its previous estimate of 2.3 percent, citing strong exports, which grew 5.9 percent in New Taiwan dollar terms in the first eight months of this year, Cathay Financial economic research department assistant manager Achilles Chen (陳欽奇) said.
However, the nation’s GDP growth might slow to 2.2 percent next year, due to the economic cycle, the trade war between the US and China, and the US Federal Reserve’s interest rate hikes, Cathay Financial said.
The trade war would cast a shadow over public confidence and export performance, Chen said, adding that the Fed is expected to raise interest rates three times next year.
Taiwan’s economy might contract in the first quarter of next year, said Hsu Chih-chiang (徐之強), a National Central University economics professor who led the research team commissioned by Cathay Financial.
On average, a small business cycle in Taiwan lasts four years, with a boom spanning three years and a contraction spanning one year, Hsu said.
It has been three years since the last recession, which happened in the first quarter of 2016, when GDP growth was 0.84 percent, he said.
In addition, Taiwan is also facing rising inflation, Hsu said.
The consumer price index (CPI) last month grew 1.64 percent, which was still below the central bank’s 2 percent target, but was the highest for the same month over the past six years, Hsu said.
The core CPI, which excludes volatile vegetable, fruit and energy items, last month grew 1.44 percent, the highest level in the past 10 years, he said.
The research team did not forecast an inflation rate for next year.
On Thursday, the central bank — after deciding to keep its policy rates unchanged for the ninth consecutive quarter — forecast that the annual CPI and core CPI would grow 1.5 percent and 1.28 percent this year respectively, and would fall to 1.05 percent and 1 percent next year.
However, Hsu said inflation might continue to rise next year due to high oil prices propped up by US sanctions on Iran’s oil exports and OPEC’s production curbs.
If the central bank keeps its policy rates unchanged next year, policymakers would need to beware of stagflation, which is when stagnation and inflation occur at the same time, Hsu said.
The nation’s GDP growth might decline next year if the trade war escalates, and if stagflation happens, the central bank would have a hard time deciding whether to raise or lower its policy rates, because a move in either direction would have an adverse effect on GDP growth and inflation, he said.
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