Taiwan (Republic of China)

Sustained growth driven by technology exports

Taiwan's growth will remain strong in 2025, albeit vulnerable to rising protectionism. The overstocking of advanced chips by US customers, driven by the threat of tariffs by the new government administration, pushed growth above trend in 2024. That said, this phenomenon could run out of steam. However, demand linked to AI and the Cloud (servers and other IT products) will continue to drive exports. They will remain the main growth driver, contributing 80% of GDP. Electronics (25% of GDP in 2023) will therefore continue to enjoy sustained growth, even if competition from China, the US and South Korea, and increased production of semiconductors, particularly “Legacy” chips, will put pressure on prices and company margins. Moreover, exports of traditional non-technology products have yet to see the beginning of a recovery due to an oversupply of chemicals and an influx of low-priced Chinese base metals, caused by the slow recovery of the housing sector and overcapacity problems on the mainland.

Household spending (47% of GDP) has slowed after a catch-up phase in 2023 but is unlikely to decline significantly due to continuing favorable labour market conditions and the gradual rise in real wages. The recently announced increase in the minimum wage and public-sector salaries by 2025 should also support household spending. This will contribute to growth in the tertiary sector (60% of GDP), including trade- and technology-related services. Additional subsidies will also help reduce the precarity of the most vulnerable workers. By 2025, inflation will continue to converge towards a level below the Central Bank of the Republic of China's (CBC) 2% target. The rebound in the housing market, combined with strong exports, means that the CBC could stand out from other central banks and take its time in lowering its key rates, which currently stand at 2% for the discount rate.

Investment (25% of GDP), with its close link to the export cycle, has accelerated sharply. The recent strength of capital goods imports points to solid momentum for the coming quarters. In addition, a new investment project, based on several of the country's science parks, has been approved by the National Science and Technology Council, to support Taiwan's position as a leader in technological and medical innovation. Construction is also buoyant against a backdrop of rising property prices. The government has also launched an investment plan for public and industrial infrastructure projects, scheduled for 2025-2028, which will lighten the budgetary burden by appealing to private investment. Last, investment will be driven by the “5+2” plan, launched in 2016, which aims to stimulate Asia Silicon Valley (connected objects), smart machines, renewable energies, biomedicine, defense, innovative agriculture and recycling.

Solid accounts

After fairly cautious budget management in recent years, the 2025 Budget looks to be particularly ambitious, with an increase of almost 20% compared to 2024. The biggest expenditure will be on social welfare, followed by initiatives in the fields of education, science and culture. The budget allocated to five priority industries, namely semiconductors, artificial intelligence, military, security and surveillance, and next-generation communications, will be increased by 40% compared to the previous year. However, the opposition is opposed to the budget and postponed its approval, which could ultimately lead to major budget cuts. Nevertheless, the budget balance will be virtually balanced in 2025. From the second half of 2025 onwards, the budget could come under pressure from the geopolitical context, with a reduction in export growth and the introduction of fiscal measures to alleviate the impact of tensions on the local economy. In addition, US pressure will continue to drive up military spending, which currently stands at 2.5% of GDP. The public debt burden will continue to fall in 2025 and will remain low by international standards.

The trade balance will remain largely in surplus, contributing to a very high current account surplus. Over 70% of exports are driven by semiconductors (40% by latest-generation semiconductors) and high-performance computing. Electronic components, in particular integrated circuits for chip assembly, and fuels will continue to account for most of imports. The services balance, traditionally in deficit (except during the Covid period) due to Taiwanese spending abroad, could be positively impacted by an increase in the number of visitors from South and Southeast Asia under the New Southbound policy or in the event of Chinese tourists being allowed to return. But a rapid return to pre-pandemic levels is unlikely. Despite being supported by the current account surplus, the Taiwanese dollar will be vulnerable to political and geopolitical uncertainties, although the CBC will be able to intervene regularly to maintain its competitiveness. Foreign exchange reserves will continue to be large and grow; they totaled the equivalent of 16.8 months’ imports in October 2024.

Agitated internal politics, pressure from China and the unknown from the US

After winning 51 out of 113 seats in the January 2024 elections, the presidential Minjindang Party (DPP) has been a minority in the Legislative Yuan (Parliament). The Kuomintang (KMT, 52 seats), with the regular support of the Taiwan People's Party (TPP, 8 seats), holds the majority. The opposition has pushed through bills that could threaten the separation of powers by increasing the power of the legislature and disrupting the functioning of the Constitutional Court. The opposition will probably continue to introduce amendments to undermine the President's efforts to pursue an ambitious political agenda, notably in the areas of defence and social protection.

The threat from China continues to loom over Taiwan. On 1 January, Taiwanese President Lai Ching-te called for Taiwan's international profile to be raised, while Xi Jinping reaffirmed his claim to the island. China's military exercises around the island in October 2024 were the biggest since the mid-1990s. In 2025, however, the risk of invasion or blockade should be contained. The ambiguity surrounding potential US military intervention in the event of an attack should act as a deterrent. Taiwan's status as a major supplier of semi-conductors also offers protection. In addition to its manoeuvres, China will continue efforts to isolate Taiwan on the international stage. Taiwan is currently recognised officially by only twelve small states in the Caribbean, Latin America and the Pacific. It is denied access to regional organisations. This does not prevent it from maintaining unofficial ties with the US, Australia, India, Japan and Europe. Taiwan's relationship with the US will remain strong, despite Donald Trump's dig that Taiwan has “stolen the American chip industry” and should pay more for its defence, with the threat of tariffs if chip production is not repatriated. Moreover, with the New Southbound policy, the island intends to strengthen its ties with South and Southeast Asia, but Chinese pressure will limit its scope.

Last updated: January 2025