Taiwan’s economy confronts a challenging outlook of slowing global growth, geopolitical tensions, and the potential impact of U.S. trade policies.
The Taiwan economy has performed strongly this year, buoyed by a combination of robust foreign demand for its high-tech exports and vibrant domestic factors such as rising consumption and investment. This dual momentum has set the stage for steady, though more subdued, economic growth next year – barring unforeseen disruptions.
But significant uncertainties and potential risks loom on the horizon. The election of Donald Trump as U.S. president and the uncertain global repercussions of his stated policies, coupled with an economic slowdown in China, could pose challenges to Taiwan’s economic trajectory.
Taiwan’s Central Bank projected in September that GDP would grow by a strong 3.82% this year, tapering to 3.08% in 2025. Some analysts are even more bullish. Ma Tie-ying, a senior economist at the Development Bank of Singapore (DBS), anticipates a 4.4% expansion this year, with a more moderate 3% growth next year.
Not all economists are as optimistic looking forward. Kevin Lau, a senior economist for Greater China and North Asia at Standard Chartered Bank, estimates GDP growth of 4.2% for this year but projects a significant slowdown to 2.3% in 2025. Generally projections for 2025 are more subdued, with economists citing the “high baseline effect” from this year’s robust performance as a key factor.
Over the past two years, global economic growth has demonstrated resilience, defying the headwinds of monetary tightening in the United States and Europe. This stability has been bolstered in large part by the strong performance of the U.S. economy. Inflation is expected to continue easing through the end of 2024, and “momentum looks favorable for early 2025,” according to a report by DBS.
The International Monetary Fund (IMF) echoes this cautiously optimistic outlook. In its October World Economic Outlook, the IMF noted that “global growth is expected to remain stable, yet underwhelming.” The fund projects global GDP growth at 3.2% for both 2024 and 2025, down slightly from 3.3% in 2023.
For advanced economies, the IMF forecasts a modest improvement. GDP growth in these economies is set to rise from 1.7% year-on-year (YoY) in 2023 to 1.8% YoY this year and remain steady at that level in 2025.
Against this backdrop, Taiwan’s exports have performed strongly, particularly in advanced silicon chips and artificial intelligence (AI) data servers. The island commands a global market share of more than 90% for these high-tech products. In China, which is aggressively expanding its own capabilities, Taiwan’s market share of AI data servers stands at 70%.
“The Taiwan economy has been one of the biggest beneficiaries of the AI boom,” says Bum Ki Son, a regional economist with Barclays.
In the first 10 months of 2024, Taiwan’s total exports amounted to approximately US$390 billion, reflecting a 10% increase over the same period in 2023. This growth was primarily driven by strong demand for electronic products, including semiconductors, while other sectors, such as plastics and chemical products, experienced weaker performance.
Son predicts that Taiwan’s impressive export growth will persist through the end of 2025, thanks to sustained global demand for high-tech products. DBS’s Ma concurs, stating that “exports are expected to remain in expansionary mode in 2025.”
While demand for AI data centers and servers may taper following this year’s surge, a potential upswing in demand for AI-enabled mobile phones, PCs, and other consumer electronics could help sustain growth in the sector, Ma says. She cites the findings of technological research firm Gartner, which projects AI-powered smartphones to make up 32% of global smartphone shipments by 2025, a significant increase from 22% this year. Similarly, the penetration rate of AI-enabled personal computers – another area where Taiwan excels in manufacturing – is expected to climb to 43% in 2025, up from 22% in 2024.
The non-profit World Semiconductor Trade Statistics organization forecasts that global semiconductor shipments will grow by 12.5% YoY in 2025. While robust, the projected growth is a slowdown from the 16% growth anticipated for this year.
The domestic economy
Investment played a pivotal role in this year’s economic growth, particularly during the second and third quarters. Barclays’ Son notes that semiconductor and other technology companies expanded their capacities and acquired new machinery and equipment to meet the demands of a booming export market and anticipated future growth.
According to the Taiwan government’s Directorate General of Budget, Accounting and Statistics (DGBAS), gross capital formation jumped 14.78% YoY in the second quarter this year and accelerated further to 15.27% YoY in the third quarter. This increase was also fueled by construction activity in the robust housing market. With the tech cycle expected to remain in expansionary mode, Son projects steady investment growth through the end of 2025.
Private consumption in Taiwan also showed notable strength this year, propped up by a rally in the stock market – driven by semiconductor and AI stocks – and the hardy property market. Private consumption growth in the first half of the year was unusually strong, reaching 4.41% YoY in the first quarter and 2.77% YoY in the second, according to DGBAS. However, it slowed to 1.92% YoY in the third quarter, signaling a potential cooling trend.
Looking ahead, Ma of DBS predicts that private consumption growth may subside, citing the already substantial gains in the stock market. The Chung-Hua Institution for Economic Research (CIER) forecasts private consumption growth at 2.67% for this year and 2.39% for next year, reflecting tempered expectations as the rally’s effects begin to wane.
DGBAS attributes the steady rise in consumption to increased shopping, recreation, outbound tourism, and a robust stock market. The retail and food and beverage sectors have flourished in recent months. Impressively, retail sales climbed 3.3% YoY in September to NT$401.8 billion, according to the Ministry of Economic Affairs. This figure, the highest ever recorded for the month, marked the 37th consecutive monthly increase in retail sales. Meanwhile, food and beverage sales saw a 4.1% YoY uptick, reaching NT$84.7 billion.
Taiwan’s tourism sector, a key contributor to domestic consumption, is gradually rebounding despite not yet reaching pre-pandemic levels. Foreign visitor arrivals this year came to 6.49 million as of mid-November, surpassing the 6.48 million recorded for the entire year of 2023, according to Tourism Administration statistics. However, this figure remains significantly below the 11.86 million visitors welcomed in 2019, prior to the pandemic and China’s suspension of individual and group travel to Taiwan in 2019 and 2020.
Taiwan’s unemployment rate remains low, standing at 3.4% in October, according to DGBAS. The rate remained stable throughout the year, fluctuating between 3.31% and 3.48%.
But Taiwan’s aging population represents a challenge. As Taiwan approaches “super-aged” society status next year – when 20% of its population will be 65 or older – the government is exploring strategies to bolster its workforce. Efforts include attracting more foreign professional talent and students graduating from Taiwanese universities, as well as welcoming more foreign workers.
Despite its tight labor market, Taiwan’s wages remain relatively low compared with other Asian nations. Chen Been-lon, a research fellow at Academia Sinica’s Institute of Economics, observes that many Taiwanese companies facing shortages of low-wage labor are reluctant to raise wages. The 3.85% YoY increase in average salaries for full-time workers in September, including bonuses and irregular pay, to NT$59,739 did little to improve the labor market’s longstanding wage stagnation.
Economists highlight several government initiatives aimed at boosting wages, which could in turn stimulate consumption and economic activity. Among these is the Executive Yuan’s decision to raise salaries for civil servants, military personnel, and public school teachers by 3% in 2025, a move that could pressure the private sector to follow suit. Additionally, the minimum monthly wage will increase by 4.08% to NT$28,590, effective January 1.
Son of Barclays is monitoring a recently announced Executive Yuan plan to incentivize small and medium-sized enterprises (SMEs) to raise employee wages through subsidies and enhanced credit guarantees. Liu Meng-chun, a research fellow at CIER, notes that Taiwan’s lowest wages are typically found in SMEs, whereas large companies are shown to offer comparatively better compensation when bonuses are included. Ma of DBS views wage growth in 2024 as staying consistent with this year’s range of 2.5% to 3%.
Rates and interests
Taiwan’s Central Bank made an unexpected move in March, raising key interest rates by 12.5 basis points to counter inflation concerns tied to a planned electricity rate hike in April. The adjustment brought the discount rate to 2%, the refinancing rate for secured loans to 2.375%, and the temporary accommodations rate to 4.25%. Afterward, the Central Bank kept rates steady in June and September. Economists largely expect rates to remain unchanged through at least mid-2025. Son of Barclays says the Central Bank may begin cutting rates in the third quarter of 2025 if consumption growth falters, while Academia Sinica’s Chen predicts no rate cuts at all next year.
The Central Bank has several reasons for maintaining steady interest rates. Son points to a likely moderation in domestic consumption next year, reducing the need for rate hikes. Additionally, easing inflationary pressures are expected to keep further tightening off the table. The Bank projects consumer price index (CPI) growth to land at 2.16% for 2024, down from 2.49% last year, with further slowing to 1.89% anticipated in 2025. According to a Central Bank press statement, a key factor is the stable outlook for international oil prices.
“The good news for Taiwan is that global petrol prices and important natural resources from overseas are keeping steady, even going down, which reduces the impact from inflation,” notes the CIER’s Liu.
Globally, inflation is easing, with the IMF projecting headline inflation to decline from 6.7% in 2023 to 5.8% in 2024 and 4.3% in 2025. The trend is expected to be evident in advanced economies sooner than emerging markets.
Climate change continues to pose a challenge, as extreme weather events could disrupt food prices. In one example, the Central Bank said weather events after June caused a surge in fruit and vegetable costs, temporarily pushing up CPI before it continued its downward trend.
The Central Bank is also adopting targeted measures to cool the overheated property market and curb speculation, hoarding, and the risk of a housing bubble. In its latest move, following a board meeting in September, the Bank announced a seventh round of credit controls aimed at tightening housing market regulations and discouraging speculative activity.
“Greater credit controls are merited to ward off an overconcentration of home loans, which increased 11% year-on-year in the first 8 months,” Central Bank Governor Yang Chin-long said after the quarterly policy board meeting.
Among other cooling measures announced in September, the Bank said it had lowered the loan-to-value ratio – the percentage of the value of a house that can be carried in a mortgage – from 60% to 50% nationwide for second-home buyers. Similar controls had been imposed earlier in the six major municipalities and Hsinchu County. The measure aims to reduce speculation by forcing buyers to put up more of their own capital to purchase properties.
Ma of DBS predicts a “soft landing” for Taiwan’s property market in 2025, while Barclays’ Son anticipates housing loan growth to peak by late 2024 or early 2025.
Asked about future economic drivers for Taiwan, Lee Chun-yi, director of the Taiwan Studies Program at the University of Nottingham, says the country needs to diversify its economy away from tech and silicon chips. “It’s not safe or healthy to rely on a single industry,” she says. “Taiwan’s leading edge in AI could be eroded.”
One sector Lee highlights as a potential future growth driver is renewable energy. Taiwan currently depends on maritime imports for approximately 97% of its energy needs, a dependence that poses significant security risks. She also warns that Taiwan’s limited power reserves may not be sufficient to sustain its critical silicon chip industry, the backbone of its economy and a key player in the global tech supply chain.
This vulnerability, she argues, underscores the urgency of faster transitioning to renewable energy to ensure energy security and economic stability.
Lee adds that Taiwan could also use its expertise in AI to pivot to high-tech, long-term healthcare, which is expected to rise in demand as Taiwanese society ages. Academia Sinica’s Chen also stresses Taiwan’s strengths in the biotech and biopharmaceutical sectors but warns that the industry’s predominantly small-scale companies are vulnerable to foreign acquisitions and are less competitive in international markets.
The big partners
Taiwan’s economy faces more onerous uncertainties and downside risks than usual from both the United States and China. U.S. President-elect Donald Trump has threatened to impose various import duties, such as a 10% universal tariff regime on imports from all foreign countries and an additional 10% to 60% on imports from China starting early next year.
While it’s uncertain whether these tariffs will be implemented or are being used as a negotiation tactic, Son warns that if a universal tariff regime of 10% and a Chinese tariff regime of 60% are enacted abruptly – a scenario he deems unlikely – they could reduce Taiwan’s GDP growth by 1.5 percentage points. This would lower Son’s 2025 GDP growth forecast from 2.3% to 0.8%.
“The more export-orientated newly industrialized economies show up as the most vulnerable, with Taiwan more visibly exposed than Korea or Singapore,” Son noted in a report on the potential impact of Trump’s tariff regimes. “We believe that Taiwan would be one of the most impacted economies in Asia, presenting downside risks to growth.”
Economists are divided on whether a significant U.S. tariff regime targeting China would spark a domestic investment surge in Taiwan. Some argue that Taiwanese companies currently operating in China and exporting to the United States might return to Taiwan to lessen the tariff impact, much as they did during the 2019 round of U.S. trade restrictions. However, Son cautions that the potential for such relocation is limited, as much of the easily transferable Taiwanese manufacturing capacity in China already moved during trade tensions experienced under Trump’s first term.
Still, Standard Chartered’s Lau says a portion of U.S. tech trade with China could be diverted to Taiwan if more tariffs are imposed. China-based Taiwanese companies could also increase their investment and production in Taiwan in a repeat of the 2019 experience, says Ma of DBS.
Lau and Ma agree that Taiwan would not be shielded from the fallout of weaker demand from both the United States and China, its largest export markets, in the event of a universal tariff regime. Ma emphasizes that the impact would largely hinge on how Taiwan’s government engages with the new Republican administration. She suggests that Taiwan could potentially negotiate by committing to promoting increased investments in the United States, a strategy that might help the island avoid punitive tariffs. In such a case, securing a double taxation avoidance agreement – negotiations for which are now underway – would be instrumental to attracting more Taiwanese companies to invest.
Trump’s proposed tariff regime, tax cuts, and expansionary fiscal policies are expected to drive inflation in the United States and strengthen the dollar, despite his preference for a weaker exchange rate to bolster American export competitiveness. A stronger U.S. dollar would inevitably affect the New Taiwan dollar. Before the election, CIER projected the New Taiwan dollar to average NT$31.97 against the greenback this year and strengthen to NT$30.76 next year.
The U.S. Federal Reserve, along with the European Central Bank, initiated rate-cutting cycles earlier this year as inflation cooled, with the Fed approving its second consecutive rate cut on November 7. DBS notes that with Trump’s election, American inflation and interest rates may not decrease as much as the market expects, posing a risk of financial instability.
Federal Reserve Chairman Jerome Powell recently deflected questions about how new tariffs on imports or reduced immigration might affect the Fed’s inflation targets, stating that the election outcome “will have no effects on our policy decisions” in the near term.
China’s economic slowdown and rising cross-Strait tensions present additional challenges for Taiwan. The IMF projects China’s GDP growth to reach 4.8% this year before dipping to 4.5% next year, compared with the 5.2% recorded in 2023. These figures underscore a steady deceleration as the world’s second-largest economy grapples with structural issues and external pressures. Slowing productivity growth and a declining workforce are projected to lower growth substantially in the longer term, according to the IMF.
American tariffs present a significant threat to China’s export-driven economy as it navigates a sluggish recovery. However, Beijing continues its push for self-sufficiency and may look to emerging markets to offset some of its export losses.
Despite Taiwan’s reduced reliance on China, China remains Taiwan’s largest trading partner and an essential economic link. According to CIER’s Liu, a 1% drop in China’s GDP growth could reduce Taiwan’s GDP growth by 0.3%, illustrating the deep economic interdependence between the two. Beijing’s leaders continue to encourage Taiwanese businesses to join the red supply chain, he adds.
There has been no clear evidence that heightened cross-Strait tensions and China’s recent military exercises have directly impacted Taiwan’s economy. Economists note that this year’s weak trade and investment between Taiwan and China is influenced by a complex mix of factors, making it difficult to attribute the slowdown to any single cause, including political tensions.
Lee of the University of Nottingham suggests that many companies relying on Taiwanese supply chains are devising contingency plans to prepare for the possibility of a cross-Strait conflict or blockade, reflecting growing concerns over geopolitical instability in the region.
“I don’t see them abandoning Taiwan, but I see them cultivating a safety blanket,” she says. Some Southeast Asian nations, including Malaysia, are positioning themselves as potential alternatives for global supply chains, leveraging their existing back-end silicon chip capacities, Lee concludes.
