Strong Growth Shadowed by Tariff Uncertainty

Taiwan’s economy ended the second quarter with a strong upswing, driven by surging global demand for AI-related chipsets and a sharp increase in semiconductor output. But the full-year outlook remains tempered by uncertainty over U.S. tariffs, easing inflation, and growing trade tensions.

Trade policy remains the most pressing external risk to Taiwan’s economy. On August 1, the White House announced a provisional 20% tariff on imports from Taiwan, effective August 7. The tariff, introduced as part of a broader package targeting multiple countries, replaces an earlier proposed 32% “reciprocal” tariff that had been temporarily suspended.

The U.S. administration clarified that the 20% rate remains provisional and open to revision. Taiwan’s government emphasized the same, committing to ongoing talks aimed at securing a lower final rate.

Markets welcomed the lower-than-expected figure. Still, the absence of a long-term resolution continues to rattle investors, and analysts caution that further trade penalties could cut into export volumes and corporate profits in the months ahead.

A Reuters poll published July 29 projected second-quarter GDP growth at 5.7% year-over-year (YoY), up from 5.48% in Q1. The stable growth was attributed to semiconductor exports and strong overseas demand.

Taiwan’s Central Bank held its full-year growth forecast at 3.05% and revised its 2025 consumer price index (CPI) estimate down to 1.81% from 1.89% projected in March. Meanwhile, the Taiwan Research Institute predicts 2025 GDP growth to land at 2.90%, citing rising downside risks as tariff pressure intensifies in the latter half of the year.

Export orders climbed to nearly US$56.8 billion in June, a 24.6% YoY increase driven by AI server infrastructure, telecom equipment, and electronics, according to the Ministry of Economic Affairs (MOEA). Orders from the United States surged 34.8%, while those from China rose 15.4%, Japan 38.5%, and Europe 2.2%. June was the fifth consecutive month of annual growth, following a record-breaking May during which orders hit US$57.93 billion.

The MOEA expects the pace of export growth to ease in July, forecasting a YoY rise of between 7.9% and 11.9%. Industrial production grew 18.7% YoY in June, with manufacturing output up 20%. The ministry warned that rapid capacity expansion in AI-related segments could disrupt the short-term supply-demand balance.

Inflation continued to retreat. The CPI dipped from 1.55% in May to 1.37% in June, the lowest reading since March 2021. The International Monetary Fund predicts inflation in Taiwan to land at 1.8% for 2025, below the Central Bank’s 2% alert threshold. Taiwan’s unemployment rate ticked up slightly in June to 3.45%, rising by 0.09 percentage points from May. The Directorate General of Budget, Accounting and Statistics (DGBAS) attributed the shift to a fresh wave of college graduates entering the job market.

Signs of Deceleration Emerge in Consumption

Consumer activity showed signs of cooling in the summer. Retail sales contracted 1.7% YoY in June, pulled down by weaker auto demand and a slower housing market. Economists pointed to cautious household sentiment, shaped by trade concerns and currency appreciation.

In more encouraging news, Taiwan Semiconductor Manufacturing Co. (TSMC) posted its best quarterly results to date. Revenue jumped 38.6% YoY to NT$933.79 billion (US$31.29 billion), while net income surged by 60.7% to NT$398.27 billion. Earnings per share hit NT$15.36. Advanced chips made up 74% of wafer revenue, with high-performance computing and AI-related clients driving roughly 60% of total sales.

TSMC lifted its full-year revenue increase forecast to around 30%, up from earlier guidance in the mid-20s. The company expects third-quarter sales of between US$31.8 and US$33 billion. However, overseas fab costs and a stronger Taiwan dollar could put slight pressure on profit margins.

The New Taiwan dollar has gained significantly in 2025, marking one of its strongest first-half performances on record. The Central Bank kept its policy rate unchanged at 2.000% in June, while reaffirming its readiness to intervene in foreign exchange markets to preserve financial stability. In its June policy statement, the bank said it remained vigilant, despite moderating inflation, given ongoing trade and currency volatility.

Real estate activity remains muted. According to government statistics, property transactions across Taiwan’s six major municipalities fell 26.4% YoY to around 130,000 units in the first half of 2025. Evertrust Rehouse, Taiwan’s largest brokerage network, reported that transaction volume in these cities were down 27.1% YoY through June. Brokers such as Sinyi Realty and Real Estate Information Center have also described buyer sentiment as subdued, attributing it to credit restrictions imposed in late 2024 in the form of tighter loan-to-value ratios and stricter second-home lending rules.

Foreign direct investment (FDI) regained ground in Q2 after a weak first quarter. Approved inbound FDI reached US$2.3 billion, according to the Investment Commission under the MOEA. The United States, Japan, and Singapore made up the largest share, and the tech sector attracted more than 60% of total investment. In capital markets, the TAIEX index rose 6.2% in Q2 but posted a choppy performance in July amid shifting expectations around global interest rates and tariff exposure.

Steady First Half, Uncertain Path Ahead           

Taiwan enters August with solid fundamentals but an increasingly fragile outlook. Second-quarter expansion and record-breaking earnings at TSMC have kept economic momentum intact. But the endurance of this growth is being tested by trade pressures and a surging local currency, threatening export competitiveness.

The Chung-Hua Institution for Economic Research (CIER) has held its 2025 GDP growth forecast at 3.05%. The estimate reflects robust first-half exports, up 5.17% YoY, propelled by front-loaded chip demand. However, growth is expected to slow sharply to just 1.08% in the second half, as tariff risks rise and global demand moderates.

CIER projects full-year export growth of 13.7%, import growth of 15.3%, private investment growth at 7.0%, and private consumption at 1.6%. Inflation is forecast to average 1.89%, with the New Taiwan dollar gaining 5.9% against the U.S. dollar.

The Taiwan Institute of Economic Research (TIER) also expects first-half GDP growth to exceed 5%, warning it could slip below 1% in the latter half. The revised forecast reflects lowered export order expectations, cooling domestic consumption, and reduced capital inflows amid growing trade uncertainty. TIER lowered its private consumption growth projection to 1.67% and trimmed its full-year inflation outlook to 1.77%, citing falling CPI levels and weak auto and retail sales. Meanwhile, it raised its private investment growth forecast to 6.04%, buoyed by a midyear surge in semiconductor equipment imports and AI infrastructure spending.