Cathay Financial cuts GDP outlook to 3.7 percent

NO HIKE EXPECTED:
The central bank is unlikely to follow the US Federal Reserve’s example several times this year to raise interest rates, an expert said, citing lower local inflation

• By Kao Shih-ching / Staff Reporter

Cathay Financial Holding Co (國泰金控) has revised down its forecast for local economic growth to 3.7 percent from 3.9 percent as the war in Ukraine has led to a rise in food and metal prices, worsening inflation and a subdued global demand, she said at a news conference in Taipei yesterday.

It’s the first time the financial conglomerate has lowered its forecast for this year – it forecast annual GDP growth of 3.5 percent in September last year and increased the figure to 3.9 percent in December, according to data from Cathay Financial showed.

“The Ukraine war is the main reason for our rework. Although Russia and Ukraine account for less than 2 percent of global GDP, they are important suppliers of wheat, metals and energy, and the war in Ukraine has pushed up oil, food and metal prices,” said economics professor Hsu Chih from National Central University -chiang (徐之強), who leads a research team commissioned by Cathay Financial.

“These price hikes will exacerbate US inflation, which was already high before the war broke out. Serious inflation could lead to lower consumption and even an economic recession,” Hsu said, adding that the Federal Reserve cut its GDP growth estimate to just 2.8 percent.

There is a strong correlation between the U.S. and Taiwanese economies as the U.S. is a key economic partner, Hsu said, adding that Cathay’s research showed that a 1 percentage point decline in U.S. economic growth is associated with a 1 percentage point decline 0.5 percentage points correlate to Taiwan’s economy.

Although exports and investment are expected to maintain momentum this year, they are unlikely to show robust year-on-year growth due to a high basis of comparison last year, Hsu said, adding that private consumption is likely to be the main driver of local economic growth this year.

“Taiwan’s high inflation may dampen private consumption, but we still estimate good annual growth” in consumption, Hsu said, adding that spending slowed amid a local COVID-19 outbreak last year.

Whether the central bank will raise interest rates again in June depends on local inflation, Hsu said.

The consumer price index rose 2.6 percent annually for the first two months of the year, and “if its growth exceeds 3 percent from March to May, there is an 80 percent chance that the central bank will hike interest rates again,” Hsu said.

The government has other tools to control inflation, such as freezing electricity or transportation costs, and all tools are likely to be tried before the central bank hikes rates again, Hsu said.

The central bank would not necessarily raise the interest rate several times since Taiwan’s inflation rate is much lower than the US, he added.