Economy & Business
Taiwan's economic outlook for 2025
While demand for AI-related products is expected to continue to boost related sectors, Taiwan’s overall economic performance faces geopolitical, energy and other challenges.
By Paul Shelton
In early 2024 it was envisaged that Taiwan’s overall economic and financial environment would be stable and that, as an export-driven economy, Taiwan’s growth prospects in 2024 depended largely on demand from its major export markets.
That 2024 forecast was made prior to Taiwan’s presidential and legislative elections (where the Democratic Progressive Party retained the presidency but lost its overall majority in the Legislative Yuan), the US election as well as ongoing wars in Europe and the Middle East.
Natural disasters and an intensely hot summer and numerous typhoons have also impacted Taiwan businesses and residents over the past 12 months.
Before going into more depth about the prospects for 2025, it is prudent to review briefly how Taiwan’s economy ended 2024 so we can then put 2025’s prospects into better perspective.
2024
It is generally accepted that in 2024, Taiwan's economy demonstrated robust performance, combined with several notable developments.
Taiwan's economy expanded by 3.97% year-on-year in 3Q24, surpassing analysts' expectations of 3.4% growth. This growth was primarily driven by strong demand for artificial intelligence-related products (AI). However, it marked a deceleration from the 5.06% expansion observed in 2Q24.
We also saw the Central Bank of the Republic of China (Taiwan) raise its 2024 economic growth estimate to 3.77% from a previous forecast of 3.22%, citing factors such as increased domestic demand and investment, while the Directorate General of Budget Accounting and Statistics (DGBAS) recently raised its forecast to 4.27% for the full year.
Exports in November surged by 9.7% year-on-year to NT$41.09 billion, exceeding expectations of 8% growth and outperforming October's 8.4% increase. This marked the 13th consecutive month of export growth, driven by a thriving AI industry and revived demand from China (but this revived demand should be treated with caution as it may be on the wane due to numerous factors, both economic and political).
In the corporate world, the bellwether of Taiwan’s economy, Taiwan Semiconductor Manufacturing Company (TSMC) reported a significant 54.2% increase in year-over-year net income for 3Q24, reaching NT$325.3 billion (US$10.2 billion), surpassing analysts’ expectations. Sales grew by 39% during the same period, again driven by strong demand for advanced 3nm and 5nm chips used primarily in smartphones and AI applications. Based on its projections, the company is expected to record high revenues and earnings for 2024. And since TSMC is at the heart of a substantial chain of suppliers and contractors, dozens of other firms benefit when TSMC does well, not to mention the wealth effect created for other unrelated sectors of the economy that benefit from close proximity to TSMC’s factories, such as real estate and retailers.
Despite these overall good results there were challenges such as Taiwan’s ongoing energy crisis. Taiwan experienced sudden price hikes and power outages and Taiwan's reliance on imported coal and liquefied natural gas, coupled with the phasing out of nuclear power, which has led to heavy dependence on fossil fuels, affecting industrial growth and investor confidence.
Recent reports of the government agreeing to a reduction in the percentage of localalisation in the offshore wind industry may give a ray of hope for this industry in 2025. However, this only applies to future projects. Ongoing projects face numerous challenges, and it remains to be seen if current ongoing projects will proceed as planned.
In a somewhat unexpected development, Taiwan's Ministry of Science and Technology has recently warned that mandatory spending cuts (seemingly driven by the balance of power in the current Legislative Yuan) could lead to a reduction of NT$20 billion (US$609.11 million) in funding for key sectors, including semiconductors, AI, and aerospace, in the coming year. This could hinder Taiwan's competitiveness in these critical industries especially heading into 2025. More on this in the 2025 section.
In short, Taiwan's economy in 2024 experienced stronger-than-expected growth, particularly in the technology and export sectors.
2025
2025, however, heralds challenges such as geopolitical risks, the prospects of slowdowns in Taiwan’s export markets, continued rising energy costs and potential government spending cuts. Taiwan's economic outlook for 2025 presents a mix of promising opportunities and notable challenges, as reflected in various forecasts and analyst’s projections.
Several institutions project steady economic growth for Taiwan in 2025. Academia Sinica forecasts a 3.1% increase in GDP, attributing this to sustained demand for high-performance computing and AI technologies. (Academia Sinica is the national academy of Taiwan and the academy supports research activities in mathematical and physical sciences, to life sciences, and to humanities and social sciences.)
Similarly, the Taiwan Research Institute (TRI) anticipates a 3.16% growth in GDP, driven by the booming AI market enhancing its export performance. TRI is an academic foundation established by distinguished business leaders and academic elites and it is registered with the Ministry of Education. TRI is a non-profit, knowledge-based, professional public think tank dedicated to the overall construction and development of Taiwan. TRI’s main tasks include policy planning and development strategy research in the fields of economics, industry, science and technology, energy, environment, finance, monetary, transportation, society, and culture.
Meanwhile, Taiwan's central bank recently raised it’s 2024 growth forecast for Taiwan but also flagged risks for 2025 centred on the trade policies of the incoming Trump administration in the United States.
Taiwan's economy has benefited from the crucial role homegrown companies like chipmaker TSMC are playing in the AI evolution (especially with TSMC expanding its fab operations in the US, Europe and Japan).
But given Taiwan’s reliance on trade, the central bank clearly believes that Taiwan could be vulnerable to across-the-board import tariffs US President-elect Donald Trump has said he will impose once he takes office on 20 January.
Taiwan's central bank said in a statement after its recent quarterly board meeting, where it kept the benchmark discount rate at 2% as expected, that uncertainty about US trade policy had greatly increased and it was advisable to be "cautious" for possible changes in the global trade landscape.
The central bank said it expected Taiwan's economy to continue the growth momentum in 2025, with new technologies including the AI boom continuing to boost Taiwan's exports.
But it is also very interesting to note that the central bank has admitted, despite its advice to be cautious, that its 2025 GDP outlook has not yet factored in the possible impact of changes in US trade policy citing it as “too big an uncertainty”.
The central bank raised its 2024 estimate for economic growth to 4.25% from a forecast of 3.82% in September, and predicted growth of 3.13% in 2025 compared with its prior call of 3.08%. Meanwhile, the DGBAS currently forecasts 3.29% GDP growth for 2025.
It seems the central bank is playing a waiting game and believes the wait is necessary so that it will have better visibility on monetary policy at the beginning of next year, pending possible changes in US tariffs.
Taiwan's central bank has also chosen to chart its own path and does not seem to feel it necessary, at present to follow the US Federal Reserve’s recent benchmark interest rate cut.
As we’ve seen, much of the discussion in relation to 2024 saw the repeating reference to the strength of AI and automation. There is no doubt that Taiwan is and will remain a leader in these fields in 2025. The rise of AI and automation is expected to continue to stimulate private investment. Taiwan's role in the AI hardware supply chain is anticipated to strengthen, supporting sustained foreign trade growth. Academia Sinica forecasts a 6.53% increase in real exports of goods and services for 2025.
We know there is the potential for difficult times ahead in 2025. The incoming US administration under President-elect Donald Trump has signalled intentions to impose tariffs on imports, which could adversely affect Taiwan's export-driven economy. The same intentions have been directed to Canada, Mexico, China, the EU and numerous other countries or regions but certainty as to the imposition and/or rates remains unclear. While the exact impact remains uncertain, such policies pose a significant risk to Taiwan's economic performance in 2025 and beyond.
Taiwan in 2025, also faces global economic uncertainties. Analysts appear to believe there will be variations in the pace of recovery among different manufacturing industries globally and this may in turn lead to slower overall economic growth, potentially impacting Taiwan's export performance clearly illustrating Taiwan’s dependence on exports.
As noted above, Taiwan's Ministry of Science and Technology has also warned that mandatory spending cuts could lead to a reduction of NT$20 billion (approximately US$609 million) in funding for key sectors, including semiconductors and AI, in the coming year. Such cuts could hinder Taiwan's competitiveness in these critical industries at a time when the prospect of US tariffs looms large. The proposed cuts stem directly from Taiwan’s opposition parties, which hold a narrow majority in the Legislative Yuan. These opposition parties passed highly contentious legislation very recently to redirect government spending from the central government to local municipalities. This largely unexpected move has been strongly opposed by the ruling DPP and thousands of civilian protesters.
Taiwan's Ministry of Science and Technology’s estimate comes after the Ministry of Economic Affairs also warned that the country's collaboration with famous tech companies, such as Micron, AMD and Nvidia, could be affected by the spending cuts and that insufficient future budgets would affect Taiwan’s international AI technology partnerships.
The economic ministry’s spending for next year is projected to be reduced by NT$29.7 billion, with NT$11.6 billion earmarked for cuts to technology projects, according to its calculations. Micron has been Taiwan’s biggest foreign direct investor. Micron, AMD and Nvidia have applied for technology collaboration projects with the Taiwan government, with partial government funding support. Will these domestic spending cuts adversely affect these companies and Taiwan as a whole? We shall have to wait and see.
Even Taiwan's defence ministry has warned of "serious impact" to security after opposition parties passed laws that will require a cut in defence spending of some NT$80 billion (US$2.45 billion). The potential of the serious impact is alarming at a time when Taiwan appears to be facing elevated Chinese military threats.
In summary, while Taiwan is poised for economic growth in 2025, driven by advancements in AI and technology investments, it faces potential challenges from international trade policies and domestic fiscal constraints. Stakeholders should closely monitor these developments to navigate the economic landscape effectively. Perhaps the words of the central bank are the most poignant here and we should adopt their approach and fully appreciate that Taiwan’s economic picture for 2025 is, at present, “too big an uncertainty”.
Paul Shelton is a consultant with 30 years of experience in the international financial services and related industries with skills in all aspects of legal and financial crime compliance and regulatory relationship advisory and management.
