The Road Ahead for Taiwan’s Economic Growth

As Taiwan enters 2024, its economy faces a mix of challenges and opportunities, with hopes pinned on a tech recovery, shifting global supply chains, and resilient domestic consumption.

As Taiwan emerged from the pandemic’s shadow this year, domestic consumers rejoiced at the reopening of restaurants and retail stores. International and inbound travel also arose as a robust economic driver in an otherwise anemic year. 

Growth projections for Taiwan’s economy have been continuously adjusted downward during 2023. Weak growth in Western countries and China dampened the normally high global demand for Taiwan’s renowned electronics components. It didn’t help that many domestic technology companies were grappling with excess inventories dating back to the pandemic era’s surge in demand for electronic products. 

As a result, Taiwan’s Directorate General of Accounting, Budget and Statistics (DGBAS) forecasts GDP growth of only 1.42% for this year, the lowest in 15 years. Other organizations have been more pessimistic – the International Monetary Fund (IMF) in October put the figure at 0.8%. 

But the outlook is starting to look rosier. Economists are cautiously optimistic that a recovery in tech demand is in sight. “The semiconductor and electronics sectors are bottoming out in a cyclical recovery,” says Ma Tieying, an economist with the Development Bank of Singapore (DBS). DBS predicts Taiwan’s GDP will grow by 3.5% next year. 

Ma’s forecast comes close to that of DGBAS, which predicts GDP growth of 3.35% in 2024. Other predictions have ranged from more cautious to more optimistic. At the lower end are Tony Phoo, a senior economist with Standard Chartered Bank, who predicts GDP growth next year of between 2% and 3%, and Bum Ki Son, a regional economist with Barclays, who forecasts 2.8%. The IMF forecasts 3% growth for Taiwan next year. 

Economists say that although rising demand is projected for Taiwan’s tech gadgets and semiconductors, the cyclical recovery in Taiwan’s tech exports may not be as robust as in previous years. “Recent data out of the U.S. and Europe shows both economies are likely to remain soft into 2024,” says Phoo. 

In its October World Economic Outlook, the IMF noted that GDP growth in advanced economies, where many end buyers of Taiwan’s tech products are located, is expected to slow from 2.6% in 2022 to 1.5% this year and slightly further to 1.4% in 2024. The major cause of this slowdown has been the effect of policy tightening by major central banks since last year. In most cases, inflation is not expected to return to target levels until 2025. 

The deceleration comes at a time when the world is still recovering from the devastating but short-lived Covid-19 recession in 2020. Russia’s war on Ukraine, which led to soaring energy prices and inflation, also slashed worldwide economic output compared with pre-pandemic levels.  

One nation that surprised markets this year was the United States, the world’s biggest economy. Despite aggressive rate hikes from the U.S. Federal Reserve that continued until July, its economy exceeded expectations. “It has gone from [prospects of] a hard landing to a milder growth into 2024,” says Phoo. 

As an energy exporter, the United States was spared more than many other countries from the impact of high oil prices. Moreover, American consumers have been more willing than most to spend savings accumulated during the pandemic. The IMF puts this year’s U.S. GDP growth at 2.1% and 1.5% next year. Things are looking gloomier in the 20 eurozone countries, which are more exposed to rising energy prices. The IMF’s October forecast for eurozone growth was 0.7% this year and 1.2% in 2024. 

Imports and exports  

Taiwan’s export performance, equal to around 63% of its GDP last year, is a strong indication of its overall economic health. Export growth this year remained in negative territory until September, when numbers turned positive at a 3.4% year-on-year (YoY) pace. But the direction reversed again in October – when a 4.5% YoY contraction brought the total to US$38.11 billion. Imports that month fell by 12.3% from a year earlier to US$32.34 billion.  

The value of Taiwan’s shipments to China and Hong Kong, which together account for nearly 40% of Taiwan’s exports, saw a decline of 3.6% YoY in October. Europe, which received almost a tenth of Taiwan’s exports, also posted negative growth at minus 16.8%. In contrast, the 10 ASEAN Southeast Asian nations and the United States registered 1.5% and 12.1% growth rates, respectively. 

Export orders, an indication of things to come, were even more dismal. At US$51.4 billion, they shrank 15.6% YoY in September and a further 4.6% in October, according to the Ministry of Economic Affairs (MOEA). The Industrial Production Index, a gauge of manufacturing activity, has been in negative territory all year.  

Still, economists are mildly optimistic about next year’s export performance. “Despite softer-than-expected exports [so far this year], we believe Taiwan’s exports are likely to continue to recover into November and December,” says Barclay’s Son.  

He adds that the surprisingly good performance of some recently launched Chinese smartphones is leading to increased demand for Taiwan’s chips. “We see decent tailwinds from smartphone demand in the next quarter or two. That should give some cushion against weakness in non-tech exports in our view.”  

In a report released in October, Ma of DBS also notes that the outlook for recovery in Taiwan’s non-tech exports appears lackluster. “High debt levels in China may discourage rapid increases in property and infrastructure investments through traditional fiscal stimulus measures, which could impact global demand for industrial metals, construction materials, and other commodities,” she wrote.  

Another risk factor for Taiwan exports is the island’s sluggish transition to green energy. The European Union’s Carbon Border Adjustment Mechanism (CBAM) is expected to have a heavy impact on the cost structure for exporters in the highest greenhouse gas-emitting industries when it comes into full force in three years.  

Although Taiwan has formally committed to net-zero carbon emissions by 2050 and this year passed its Climate Change Response Act, its green energy development has faced several obstacles. Due to bureaucratic procedures and stringent local content requirements, many projects have been delayed. Japanese investors have begun dropping out of offshore wind projects in Taiwan due to rising costs and worsening delays.  

Oil refiner Eneos Holdings announced in November that it may withdraw from the Yunlin Offshore Wind Project in the Taiwan Strait, following regional utility Shikoku Electric Power’s decision to withdraw from the same project due to delays threatening its profitability. Jera Co. announced in June that it had completed the sale of its stake in Formosa 3, another Taiwanese offshore wind project. In addition, Danish offshore wind developer Ørsted in September decided not to submit a bid in the first auction of the Round 3 Zonal Development Phase in Taiwan.  

Given Taiwan’s scarcity of renewable energy, its exporters of affected industries will struggle more than many of their international competitors to benefit from low EU import tariffs and thus maintain competitive pricing. Adding to the pressure, the United States is considering implementing its own CBAM policy. 

One risk factor for Taiwan exports is the island’s sluggish transition to green energy.

Domestic drivers  

The pandemic-induced chip shortage during the last couple of years turned into “too much production and not enough demand” in 2023, according to Lee Chun-yi, an associate professor at the School of Politics and International Relations at the University of Nottingham. As a result, inventory destocking caused a decline in company investments, with gross capital formation contracting by 12.29% YoY in the third quarter, extending the 13.44% YoY contraction seen in Q2.  

“The major hits to investment were in the area of construction and machinery,” notes Barclay’s Son. “With corporates remaining cautious towards investment, given the weak global growth outlook into 2024, domestic growth will remain soft into H1 2024.”  

Meanwhile, Taiwan Semiconductor Manufacturing Co. (TSMC), the world’s largest chip maker, registered a capital expenditure of approximately US$32 billion this year, falling at the lower end of the company’s usual range. TSMC’s CapEx budget serves as a barometer for market conditions. But next year major tech companies are expected to introduce new product models and encourage consumers to upgrade their products, which is expected to lead to increased investments.  

A bright spot this year was private consumption, which turned out to be a driver of growth when exports dropped sharply in the year’s first half. Consumers took advantage of the recovery from the pandemic to travel, shop, and eat at restaurants.  

In addition, the government’s stimulus measure in the form of NT$6,000 cash handouts injected an estimated NT$140 billion into the domestic economy, Ma says. Private consumption showed a rarely-seen high growth of 12.56% YoY in the second quarter. DGBAS partially attributed the uptick to a low baseline effect owing to the pandemic, and growth softened to 9.23% in the third quarter.  

Economists warn that private consumption will be unlikely to provide such a strong economic boost in the future. Ma predicts private consumption will gradually return to its normal annual growth rate of 2-3%. Regarding government consumption, the Chung-Hua Institution for Economic Research (CIER) puts growth at 2.53% this year and 1.79% next year.  

In September, the Executive Yuan approved a 4.05% increase in Taiwan’s minimum monthly wage to NT$27,470. The change will take effect on January 1, 2024, along with a 4% wage increase for workers in the public sector. In a September press release, the Central Bank said it expects the rise to help Taiwan’s private consumption continue to grow next year, albeit at a slower pace due to the higher baseline. 

Taiwan’s unemployment rate stood at 3.48% in September, according to DGBAS. The workforce is also shrinking as Taiwan moves toward becoming a super-aged society, with at least 20% of the population aged 65 years or older, by 2025.  

However, Ma of DBS sees labor market conditions remaining resilient in 2024. “The rebound in inflation may erode real wages, but employment conditions are expected to remain stable,” she says. Average monthly earnings, once bonuses and irregular pay are factored in, stood at NT$54, 967 (around US$1,755) for September this year. According to a September survey released by 1111 Job Bank, 90% of office workers in Taiwan are dissatisfied with their salary, the highest wage dissatisfaction rate seen in five years. 

Another unusual economic development for Taiwan was the rate of inflation. At 3.05% YoY, the rise in October’s Consumer Price Index (CPI) was the highest figure seen this year, up from September’s 2.93%.  

Generally, sharp escalations of international energy prices have been largely absorbed by Taiwan’s state-owned oil refiner CPC Corp. This policy has helped spare Taiwan from the soaring inflation rates seen in other countries in 2022 and 2023.  

U.S. Federal Reserve Chair Jerome Powell remains uncertain about whether more policy tightening will be needed in the United States.

Local media quoted DGBAS officials as blaming October’s high figure on recent typhoons, which damaged crops and caused a rise in fruit and vegetable prices. In fact, core inflation – excluding fruit, vegetables, and energy – remained low at 2.49% YoY in October, and the Central Bank forecasts Taiwan’s 2023 headline inflation at 2.22% before falling to 1.83% next year. But in the long term, the increasing frequency of extreme weather events caused by climate change is likely to pose risks to agriculture, further fanning inflation.  

After a year of raising interest rates to their highest level in eight years in March, the Central Bank left rates unchanged for the rest of 2023. The discount rate has remained at 1.875%, the rate of refinancing of secured loans at 2.25%, and the rate on temporary accommodations at 4.125%. At its September board meeting, the Central Bank justified the flat rates by stating that “domestic inflation is softening gradually, and the inflation rate is expected to come down below 2% next year. Furthermore, the domestic economy will likely expand at a slower-than-expected pace this year.” 

Still, Central Bank Governor Yang Chin-long in November left the door open to another rate hike, according to Focus Taiwan, declining to confirm whether Taiwanese rate hikes had come. His comment followed U.S. Federal Reserve Chair Jerome Powell’s statement that he is uncertain about whether more tightening will be needed in the United States. But economists broadly believe Taiwan’s rates will remain unchanged when the Central Bank board meets again in December and March next year. “Our view is that they are likely to adopt a pro-growth stance, especially with inflation cooling off,” says Phoo. 

In her October report, Ma says the Central Bank is keeping a watchful eye on the credit market’s risks. Consumer loans for housing purchases rebounded to 4.9% YoY in July.  

“Banks’ exposure to the real estate sector remains high, with housing mortgage loans and construction loans accounting for 37% of the total loan portfolio,” says Ma. “Further tightening of (loan-to-value) ratios to ensure financial stability is a possibility, but the CBC may want to see more convincing signs of economic growth recovery before implementing such measures.” 

With regard to exchange rates, the New Taiwan Dollar has been depreciating against the U.S. dollar this year. CIER calculates the 2023 average as NT$31.18 to the greenback and expects appreciation to NT$30.77 in 2024.  

Bloomberg reported in November that escalating tensions between Taiwan, the United States, and China, plus fears of a global economic slowdown, have caused foreign investors to pull US$7.4 billion from Taiwanese stocks this year, the most in Asia. Still, the benchmark TAIEX gained 16% so far this year, making it the second-best-performing stock market in the region after Japan.  

Shifting supply chains 

One prominent feature of Taiwan’s economy over the years has been shifts in the private sector’s deployments of supply chains at home and internationally. After the U.S.-China trade war began in 2018 and during President Tsai Ing-wen’s second term, a significant portion of high-end manufacturing in electronics and other technologies was lured back to Taiwan from China.  

“Now we can expect to face another reversal,” says Kevin Wang, an economist at Taishin Securities Investment Advisory, alluding to Taiwanese businesses’ increasing interest in investment in production facilities in the United States and Southeast Asia.  

Taiwan’s outward direct investment this year continued to outpace inward direct investment as Taiwanese companies diversified their supply chains. As of August, outward direct investment had seen growth of 68.8% YoY, while inward direct investment declined by 26.9%. 

At around US$5 billion, investment into the United States constituted 37% of Taiwan’s overseas investments for the first eight months of 2023. The recipients of the second-largest amount of overseas investment were the 10 ASEAN nations. At US$2.8 billion, ASEAN accounted for 20% of the foreign investment pie. Ma of DBS notes that investment in China, valued at around US$2.4 billion, was third, taking up 15-20% of Taiwan’s overseas investments.  

On trade, exports to Hong Kong and China reached a peak of 45% of Taiwan’s total exports in 2020, Son says, but as of October this year, the proportion had dropped to 37.2%. The United States accounted for 18.9% of Taiwanese exports in October. 

 Son says his key takeaway from this shift is that “Taiwan’s position in electronics supply chains is irreplaceable,” and it is not being excluded from supply chain reconfigurations. “More and more economies are asking Taiwan to be involved in supply chains. We think Taiwan will be able to secure this position in the longer term.”  

In line with the trend of de-risking, Taiwanese companies are looking to manufacture closer to their customers, even setting up shop in Mexico to serve the U.S. market. “This will help with the internationalization of Taiwanese firms, which previously only had experience with China,” says Liu Meng-chun, an economist with CIER. Taiwanese companies in China are also starting to sell more in the domestic Chinese market than before, he adds. 

Some economists caution that the shift to the United States and Southeast Asia doesn’t mean China is becoming a less important economic partner to Taiwan. Phoo of Standard Chartered expects China to remain a key manufacturing base for Taiwanese companies. “I think this migration will continue but will not in any way undercut the importance of China from the manufacturing point of view,” he says. 

TSMC is building two fabs in Arizona at a cost of US$40 billion. The company is also setting up a new plant in Japan and is committed to a €10 billion joint venture fab in Germany. The initiatives are a test for TSMC to see if it can transform itself from a Taiwanese company into a true multinational. 

Recently, TSMC dropped plans to build a factory in Longtan in Taoyuan amid protests from residents whose land would be expropriated. The incident laid bare the problems posed by the so-called “five shortages” (land, talent, power, labor, and water) in Taiwan, a common point of discontent in the business community. Phoo notes that Taiwan will need to address talent and infrastructure issues to keep companies like TSMC growing onshore for the long term. 

Economists say that a worse-than-expected slowdown in global growth remains a risk factor for the United States and other Western nations, which might engage in more interest rate tightening to combat inflation, which aggravates the drag on growth.  

The current murky state of the Chinese economy is another risk. China’s post-pandemic recovery slowdown was attributed to downturns in property values and a decline in global demand for its manufactured goods. According to the IMF, China’s economy is projected to grow by 5.4% this year and 4.6% in 2024, far below the double-digit pace that China had grown accustomed to. 

Quoting economists, Reuters reported that the combination of the downturn in China’s property sector and local government debt crunches could wipe out much of the economy’s long-term growth potential. Reuters estimates local debts reached US$12.6 trillion – or 76% of China’s economic output – in 2022, up from 62.2% in 2019.  

How the Chinese government handles problems surrounding local government debts will be critical. Founder of the Yuanta-Polaris Research Institute Liang Kuo-yuan describes China as a “lingering and unknown factor” in gauging Taiwan’s economic outlook. He says China’s GDP growth of over 5% this year is “not bad in the near term, but we have to worry about China in the medium-to-long term.”