Taiwan posted another month of precipitous contraction in export growth in October, an 8.3 percent fall year-on-year, compared with the 1.6 percent dip in September. This marked the worst monthly performance since the 2001 recession.

The primary reason behind the sharp deceleration was the much weaker-than-expected demand from the mainland, Taiwan's biggest trading partner, which accounted for almost a quarter of the island's total exports. The mainland alone contributed -5.3 percentage points toward the headline contraction.

The structural problem within Taiwan's export sector lies with the lack of industry diversification and limited brand recognition on the global market.

The heavy reliance on high-tech products makes Taiwan most vulnerable to the current severe downturn in global discretionary consumption.

We therefore expect Taiwan's export growth to contract next year for the first time since the tech bubble burst in 2001.

Taiwan's October CPI inflation fell further, with continued feed-through of lower global commodity prices; the typhoon season pushed up food prices temporarily.

Taiwan's October headline CPI rose by 2.4 percent year-on-year, compared with 3.1 percent in September. Meanwhile, core CPI continued to ease, staying flat over the previous month.

Going ahead, the recent keen falloffs in wholesale and import prices confirmed that pipeline inflation pressure has remained subdued.

We expect Taiwan's CPI inflation to be well-contained in the coming quarters, with the 2009 CPI inflation forecast at 2 percent year-on-year.

Given the backdrop of easing inflation, slaughtered sentiment and decelerating growth, we expect the Taiwan central bank to continue to ease monetary policy.

So far, its central bank has announced 87.5 basis points cuts on rediscount rate to release debt burdens on households and corporate.

Although the rate cut will not turn around the economy in the short run, it will help improve confidence.

We forecast an outright global recession led by the G7 with near-term risks tilted to the upside, while Taiwan's export industry is likely to witness a more severe downturn in the coming months.

A slowdown appears inevitable now and we expect to hear more aggressive tax reforms on corporate and income tax from the government to support domestic demand growth along with the latest improvements in cross-Straits relationships.

Polaris Securities provided the article.

(HK Edition 11/13/2008 page3)