Expansion Holds, Risks Shift               

Finishing the last quarter of 2025 with its fastest quarterly growth since 1987, at 12.65% year-over-year (YoY), Taiwan’s economy has carried strong momentum into the second quarter of 2026. Performance has been supported by sustained demand for artificial intelligence infrastructure, high-performance computing, and advanced semiconductor manufacturing. The Directorate-General of Budget, Accounting and Statistics (DGBAS) forecasts full-year GDP growth this year of a whopping 7.71%.

That strength is visible most clearly in the area if international trade. Exports reached US$49.8 billion in February, rising 20.6% YoY, according to Ministry of Finance data. That growth was even more remarkable considering that more working days in the month of February were lost due to the Lunar New Year break this year than last. While the pace marked a clear slowdown from January’s 69.9% YoY surge, it reflects continued global demand for Taiwan’s core technology exports, particularly semiconductors and AI-related hardware.

Imports rose more modestly, increasing 6.85% YoY to US$37.03 billion in February. The resulting trade surplus widened to approximately US$12.77 billion, reinforcing Taiwan’s position as a net exporter of high-value technology goods at a time when global supply chains remain in flux.

Overall industrial production rose 15.8% YoY in February, while output of electronic components expanded by more than 25%, according to the Ministry of Economic Affairs (MOEA). High-tech manufacturing remains the dominant driver, with production concentrated mainly in semiconductors, electronic components, and AI-related hardware.

Meanwhile, private consumption is projected to grow 2.51% in 2026, according to DGBAS, reflecting steady but not accelerating household spending. Retail sales rose 4.7% YoY in February, with cumulative growth of 3.1% for the first two months of the year, according to MOEA data, suggesting that consumption remains supportive but secondary to external demand.

Labor market conditions remain stable. The unemployment rate stood at 3.29% in January, broadly in line with pre-pandemic averages, according to DGBAS. Wage growth has also strengthened, with average monthly regular wages rising 3.09% in 2025, the fastest pace in 26 years, according to DGBAS, providing some support to household income even as consumption growth lags.

Inflation remains contained, though risks are rising. Consumer prices increased 1.75% YoY in February, while core inflation remained close to 2%. This marks a continuation of a broader trend of moderate price growth, allowing monetary policy to  stay unchanged.

That stance was reaffirmed in March, when the Central Bank left the benchmark discount rate at 2.00%, citing stable inflation alongside growing external uncertainty.

Financial conditions remain broadly positive, though increasingly sensitive to global developments. The New Taiwan dollar has been trading between NT$31 and NT$32 against the U.S. dollar in early 2026, supported by strong export receipts but subject to intermittent pressure from capital flows. In recent months, foreign institutional investors have returned to semiconductor-related equities, though flows have become more volatile amid shifting global sentiment, according to Taiwan Stock Exchange data.

Iran War Sends Global Shocks             

A new source of global uncertainty emerged on February 28, when American aggression toward Iran escalated into open conflict, disrupting energy supply routes due to the chokepoint of the Strait of Hormuz. The shock has since spread across markets, affecting oil prices, financial flows, and global trade conditions.

The most immediate impact has been on oil prices. Disruptions to shipping through the Strait of Hormuz, the passageway for roughly one-fifth of global oil supply, have pushed crude prices above US$100 per barrel, at times reaching as high as US$119.5, according to Reuters. Brent crude has remained around 35% above prewar levels, Reuters reported.

The effect on global trade has been both direct and indirect. Shipping disruptions and higher fuel costs have increased transportation expenses, while uncertainty over supply routes has complicated logistics planning. Reuters reports that disruptions could remove up to 20 million barrels per day of supply from global markets, while fertilizer shipments and aviation fuel costs have also been affected, raising broader concerns about supply chain stability.

Recent data suggests that these pressures are already materializing across major economies. In the euro zone, business activity slowed to a 10-month low in March, with higher energy costs weighing on demand and output, according to purchasing managers’ index data. In the United States, producer prices rose sharply in February, driven in part by higher energy and services costs, according to Reuters.

The International Monetary Fund has warned that a sustained 10% increase in energy prices could raise global inflation by approximately 0.4 percentage points while reducing economic output by 0.1% to 0.2%.

U.S. equities fell on March 24, with the Nasdaq declining 0.84%, the S&P 500 0.37%, and the Dow Jones Industrial Average 0.18%, as oil prices surged and investors reassessed inflation risks, Reuters reported. Markets saw a modest rebound the following day on tentative ceasefire signals.

Asia has been hit particularly hard. Foreign investors withdrew US$50.45 billion from Asian equity markets in March, the largest outflow since at least 2008, according to Reuters. Taiwan accounted for approximately US$25.28 billion of those outflows, the highest on record in at least 18 years, with especially heavy selling in technology stocks.

For Taiwan as an energy-importing economy, higher oil and gas prices translate directly into increased production costs, particularly for manufacturing and transportation. While these effects have not yet fully appeared in consumer price data, policymakers have begun to adjust their expectations.

The Central Bank has raised its 2026 inflation forecast to approximately 1.8%, up from 1.63%, citing the potential impact of higher global energy prices, according to Reuters. Officials have warned that if inflation were to rise above 3%, monetary policy could shift toward tightening.

There are also early indications that global uncertainty is affecting trade expectations. Export orders received in February fell short of forecasts, suggesting that supply chain disruptions and shifting demand conditions could begin to weigh on Taiwan’s export momentum.

Taiwan, heavily reliant on imported energy, has secured alternative liquefied natural gas (LNG) supplies, including shipments from the United States, after previously relying on Qatar for roughly one-third of its LNG imports, according to MOEA officials. The authorities have emphasized that strategic reserves and contingency plans are in place to manage short-term disruptions.