Taiwan should not underestimate the risk of rising imported inflation caused by the escalating conflict between Israel and Hamas, as global crude oil prices could spike if the conflict spreads. That would add to an uptrend in inflation, as the central bank has said it would be the “new norm” for Taiwan’s inflation to exceed its 2 percent target.
The consumer price index (CPI) is expected to rise 2.22 percent year-on-year primarily due to higher costs of crude oil and commodities, the central bank forecast last month. It would be the third straight year that the index has increased more than 2 percent. Next year, the CPI is expected to be 1.87 percent, based on the monetary policymaker’s projections. That indicates that any economic shock could again push the index above the 2 percent target.
In response to legislators’ concerns, National Development Council Minister Kung Ming-Hsin (龔明鑫) yesterday said that the council is closely monitoring the Israel-Hamas conflict to see if it affects any oil-producing countries, as it could curtail oil exports and drive oil prices higher should embargoes on oil exports be imposed. Some oil exporters support Hamas, such as Iran. If the war grows, some oil-producing countries might seek to use oil as leverage against Israel and its Western allies. Oil disruptions would cause global crude oil prices to spike and lead to imported inflation for Taiwan. If that happens, the central bank would have to raise key interest rates to keep Taiwan’s economy in check. The nation’s GDP is expected to grow 3.8 percent year-on-year next year, the bank said.
Brent crude for December delivery and West Texas Intermediate for November delivery last week climbed 7.5 percent and 5.9 percent respectively.
Kung’s remarks came after the IMF last week said that the war between Israel and Hamas could spur inflation and hamper global growth, should it worsen and cause a significant increase in oil prices. Based on IMF modeling, a 10 percent increase in oil prices would cause inflation to rise 0.4 percentage points the following year.
Directorate-General of Budget, Accounting and Statistics Minister Chu Tzer-ming (朱澤民) on Thursday downplayed the potential effects of the Gaza crisis, saying that the conflict would not directly affect prices globally, as Palestine and Israel do not export crude oil or grains and other commodities, unlike Russia and Ukraine. He stood pat that Taiwan’s GDP would expand at an annual rate of 1.6 percent as the agency had projected, ignoring the IMF’s growth forecast of 0.8 percent for Taiwan’s economy.
The Israel-Hamas conflict would have a limited effect on Taiwan in light of their small share in the nation’s trade, the Ministry of Finance said last week. Taiwan’s exports to Israel totaled US$1.1 billion last year, 0.2 percent of overall outbound shipments, ministry data showed. Imports from Israel, consisting mainly of precision optical machinery, totaled US$2.15 billion last year, making up 0.5 percent of the nation’s imports, the data showed.
Despite slim trade with Israel, as a small and export-oriented economy, Taiwan is unlikely to be exempted from any global economic shocks. The US economy is facing rising uncertainty due to the Gaza crisis, although US Secretary of the Treasury Janet Yellen said that it would be too early to “speculate on whether or not there will be significant consequences.” The US is the third-largest export destination for local businesses.
As any economic implications from the political tensions in Gaza remain elusive, Taiwan should remain alert for any contingencies and be ready with countermeasures.
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