Signs of economic weakness are emerging out of Asian tigers South Korea and Taiwan as the slowdown in key trading partner China takes a toll on the export-driven nations.
The mainland is the biggest export destination for South Korea and Taiwan, accounting for 24 and 27 percent, respectively, of overall shipments.
“Data out of Korea and Taiwan reflects the weakness in China we saw in the first-half. When you look at share of exports that China takes from those two countries, if Chinese demand weakens its inevitable they suffer,” Dariusz Kowalczyk, Senior Economist & Strategist, Asia ex. Japan at Credit Agricole told CNBC.
Taiwan’s economy unexpectedly contracted in the second quarter by 0.2 percent from the same period a year earlier. The country’s government on Tuesday cut its annual growth forecast to 2.1 percent from 3 percent as export growth forecast was slashed to 0.1 percent from 2.7 percent.
In South Korea industrial output in June contracted by 0.4 percent from May - the first month-on-month shrinkage in three months.
Products exported to the mainland market include hi-tech components and goods, autos, household appliances and machinery.
A large portion of the goods shipped to China, for example technology components, are used to assemble products which are then re-exported. But Erik Leuth, Senior Regional Economist at RBS Global Banking & Markets, says an increasing share of Taiwan and South Korea’s exports are consumed within China.
Exports to China make up 18 percent of Taiwan's gross domestic product (GDP), and 12 percent of Korea's GDP, according to Credit Agricole.
Leuth says while he expects Chinese economic growth, and hence demand, will likely improve in the second half of the year, overall exports out of the two countries will remain flat, due to continued weakness in Europe and the United States.
Expect Monetary Easing
With the outlook remaining bleak, Kowalczyk and Leuth say there is increasing likelihood that central banks in both countries will step in to prop up growth via monetary policy in the coming months.
“For China the worst is over, but for rest of Asia it may not be the end of bad news. Policymakers need to take insurance against that, which is increasing chance of rate cuts,” Kowalczyk said.
The Bank of Korea, earlier this month unexpectedly cut its benchmark interest rate by 0.25 percent to 3 percent - its first such move in 3 years. Taiwan’s central bank, which has a strong focus on price stability, however kept its rates on hold in June for the fourth consecutive quarter at 1.875 percent.
By CNBC’s Ansuya Harjani