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אוסטרליהSustained growth driven by technology exports
Taiwan’s economic growth is expected to slow but still remain robust in 2027 after strong acceleration in 2025 and 2026 on back of booming exports. As the world’s leading producer of semiconductors, the island is benefiting significantly from rising global demand for computing power and AI technologies, which in turn is boosting semiconductor exports. External trade remains the main growth driver and accounts for the 70% GDP growth rate so far in 2026. As a result, the country is particularly vulnerable to a slowdown in global AI investment, as well as to both US and Chinese protectionist policies. Nevertheless, the strong growth trend demonstrated by the electronics sector is expected to continue, although the latter will face increasing competition as the US, China and South Korea seek to reduce their dependence on Taiwanese semiconductors. Expanding production capacity could put downward pressure on prices, particularly for legacy chips, which are less complex to manufacture. At the same time, traditional sectors are grappling with a less favourable environment. Output in the metals and chemicals industries, challenged by an influx of competitively priced Chinese production, is significantly below the 2021 level. Agricultural production stagnated in 2025 before posting moderate growth in the first quarter of 2026. Construction activity was also subdued throughout 2025 and in the first quarter of 2026, as the country continues to contend with persistent housing-related challenges. Increasing concentration of economic activity in the electronics sector is the result of this two-speed economic dynamic.
After a subdued 2025, household consumption (41% of GDP) staged a modest rebound and is expected to grow by 3.6% in 2026. It is being supported by both government measures and improving labour market conditions, although it continues to benefit only marginally from the strong performance of electronic exports. On the policy front, the government's dual price mitigation mechanism, under which state-owned CPC absorbs part of fuel price increases while Taipower absorbs part of electricity tariff adjustments, has helped shield households from the recent energy price shock. As a result, despite a sharp rise in import prices (+26% year-on-year in June 2026), consumer price inflation has remained moderate and sits slightly below the Central Bank of the Republic of China’s (CBC) 2% target. In this context, a tightening of monetary policy – the policy rate was 2% in July 2026 – appears unlikely in 2026. Household spending has also been buoyed by the universal cash transfer programme launched in November 2025, amounting to TWD 230 billion, or 0.7% of GDP. A bill to renew the scheme is currently being considered. Meanwhile, labour market conditions have continued to improve, with the unemployment rate falling to 3.3% in May 2026, its lowest level for a month of May since 2000. The trend has been largely driven by job creation in accommodation and services. The improvement could further strengthen a virtuous cycle between household spending and employment.
Investment (24% of GDP) is expected to remain highly robust in 2026 (+6.2%) despite a slight slowdown mainly on back of weaker investment by state-owned enterprises. Private investment, however, is expected to continue growing at a strong pace, driven by commitments from major global electronics companies. Imports of semiconductor-related capital goods have risen by 22.4%, underscoring ongoing capacity expansion in the sector. AMD has announced a USD 10 billion investment to support the ramp-up of AI server rack production capacity in the second half of 2026, while Google has so far increased its local investments this year by TWD 27 billion (USD 840 million) to expand its data centre infrastructure.
Sound public finances and limited indebtedness
The fiscal balance is expected to remain close to equilibrium in both 2026 and 2027. The 2026 budget bill, which in July had not been passed, proposes a significant increase in military spending (+14% to 3.2% of GDP) and public investment in technology (+13%), particularly in AI, semiconductors, defence research, security and surveillance, and telecommunications. Social spending will continue to represent the largest expenditure category, accounting for 11% of GDP. Nevertheless, the projected 2026 deficit (1% of GDP) could slightly exceed expectations due to the implementation of energy price support measures. State-owned enterprises Taipower and CPC have fully absorbed the increase in international energy prices, with natural gas accounting for 40% of the electricity mix, resulting in substantial losses for both companies. Taipower’s total debt alone amounts to 9% of GDP. Despite these pressures, public debt is still low by international standards and is predominantly held by domestic banks.
The trade balance is expected to remain firmly in surplus, which will help underpin Taiwan’s exceptionally large current account surplus. Export growth is likely to remain strong in the second half of 2026, supported by a robust order backlog and accelerating AI-related investment by cloud service providers. Google, Amazon, Meta and Microsoft have collectively revised their 2026 capital expenditure forecasts upward, from USD 670 billion in February (+62% year-on-year) to USD 725 billion in May (+75% year-on-year). By contrast, non-technology exports have consistently underperformed, growing by only 7.5% between January and May 2026. The Central Bank of the Republic of China (CBC) has highlighted several non-tech industries that could successfully reposition themselves to benefit from the AI boom, including petrochemicals through specialty products, the metals industry through cooling solutions and server rack components for AI infrastructure, and the construction sector through engineering services for semiconductor manufacturing facilities. The services balance has traditionally posted a deficit (except during the Covid-19 period), a result of Taiwanese spending abroad. However, it could benefit from an increase in visitors from South Asia, Southeast Asia, and the Pacific under the New Southbound Policy launched in 2016, and from the prospect of a genuine reopening of tourism from mainland China. That said, a rapid return to pre-pandemic tourist levels is unlikely. The current account surplus will continue to finance rising outward foreign direct investment, following a sharp increase in 2025 (+40% year-on-year). In this context, TSMC has announced a USD 100 billion investment in semiconductor manufacturing in the US. Spread over several years, it represents the largest FDI project currently under way worldwide.
Despite political and geopolitical uncertainty, the Taiwanese dollar is benefiting from the current account surplus, which could undermine competitiveness, particularly vis-à-vis South Korea. The CBC intervenes on an ad hoc basis to limit upward pressure, but faces pressure from the US, as Taiwan is on the US Treasury’s surveillance list for currency manipulation. Foreign exchange reserves were the equivalent of 10 months of imports in June 2026 and consist primarily of US Treasury bonds.
Domestic political turbulence, Chinese pressure and uncertainty over the US
Since the January 2024 elections, the ruling Democratic Progressive Party (DPP) has held only 51 of the 113 seats in the Legislative Yuan (a unicameral parliament), stripping it of a parliamentary majority. The Kuomintang (KMT), with 52 seats, commands a majority with the regular support of the Taiwan People's Party (TPP), which holds eight seats. The opposition succeeding in having legislation passed that could undermine the separation of powers by enhancing the authority of the legislature and disrupting the functioning of the Constitutional Court. In May 2026, opposition parties unsuccessfully attempted to initiate impeachment proceedings against President Lai. As of July 2026, the 2026 budget bill had still not been passed, although the 2025 budget had been rolled over and several appropriations, notably in the defence sector, had been approved. The main points of contention concern proposed increases in military salaries and social welfare spending. The local elections scheduled for November 2026 are expected to have only a limited impact on national politics. The next presidential election is due in 2028.
Pressure from Beijing on Taipei is expected to persist. In December 2025, China’s new Justice Mission military exercise simulating a full blockade of the island was particularly noteworthy. In addition to a threat of a military invasion, diplomatic pressure continues to erode Taiwan’s international standing. In 2026, only twelve countries (mainly small states in the Caribbean, Latin America and the Pacific) still formally recognise the Republic of China (Taiwan), compared with twenty-three in 2016. Taiwan is also excluded from most international organisations.
Taiwan’s relationship with the US is expected to remain strong. Washington is likely to maintain its policy of strategic ambiguity regarding potential intervention in the event of an armed conflict, while continuing to supply military equipment in accordance with the Taiwan Relations Act. Taiwan’s position as a key global supplier of semiconductors also serves as a deterrent factor, despite the Trump administration’s efforts to relocate part of semiconductor manufacturing capacity to the US. Uncertainty hangs over the future of the US-Taiwan Agreement on Reciprocal Trade (ART) signed in February 2026 and designed to encourage Taiwanese investment in the US in exchange for preferential tariff treatment on selected products in the wake of the US Supreme Court’s decision to strike down IEEPA-based tariffs. Taiwan is also expected to continue cementing unofficial ties with Australia, India, Japan and Europe. Last, although President Lai continues to underscore Taiwan’s distinct identity and the need to safeguard its sovereignty and democratic freedoms, public opinion is likely to remain broadly supportive of maintaining the status quo regarding relations with mainland China.