Taiwan (Republic of China)

Gradual recovery of the economy

The export-oriented island nation suffered from a sluggish global demand in 2023, implying bad external performances. Its exports decreased by 9% in the first half of the year compared to the same period in 2022. Exports to China and the US, its key trade partners, shrank respectively by 26% and 10% year-on-year in the January-August period. However, private consumption was strong and contributed the most to GDP growth. We expect the economy to recover gradually in 2024, driven by external rather than domestic demand, provided that the global economy improves and geopolitical tensions with China and in Ukraine do not escalate. An additional significant risk would be the spread of the conflict in the Middle East prompting a surge in oil prices and a slowdown in the global economy.

ICT products, particularly semiconductors, account for the bulk of Taiwan’s exports thanks to its important position in the global electronics value chain. After benefiting from a strong demand during the pandemic, demand fell drastically in 2023 due to subdued global economic recovery, characterised by a shift from manufacturing to services, high interest rates, increased global inflation and geopolitical tensions. Positive signs have emerged that point to a gradual recovery for the ICT sector in 2024. In March-July 2023, although electronic components exports were still lower than a year earlier, inventories started to decrease allowing a pickup in shipments. In addition, exports in information, and communication products surged by 49% in July-August 2023 compared to 2022. Looking forward, generative AI, cloud computing and the launch of new smartphones and PCs that induce consumer upgrades could be drivers of the recovery of the Taiwanese ICT industry. Private consumption expenditures (50% of H1 2023 GDP) were the main growth driver in the first half of 2023, with a 9.1 % increase compared to the year-earlier level. High savings build-ups during the pandemic and consumption vouchers issued by the government drove the increase. Thanks to significant job creation in the services sector, the unemployment rate reached its lowest in August since January 2001 (3.4% s.a.). Job market resiliency along with the minimum wage hike scheduled for January 2024 (+4.05 % monthly and +3.9 % hourly) will continue to support households spending. However, the island is heavily dependent on external energy prices since it relies on imports for more than 95% of its energy needs. Hence, a surge in global commodity prices could drive prices up, affecting private consumption. Moreover, the housing market worsened in 2023 as building permits and housing transactions plunged in the first half of 2023. A potential price correction through a fall in house prices could trigger a negative wealth effect, adding a further negative impact on household spending.

Small increase in budget deficit which is nonetheless tiny

The annual revenue for the 2024 general budget of the central government is estimated at NT$2.709 billion and annual expenditure is set at NT$2.881 billion, representing a respective 5% and 7.2% increase compared with 2023. The outstanding public debt load is expected to increase but is still below the legal limit for the central government (40.6% of GDP), stipulated in the Taiwanese Public Debt Act. The budget is mainly allocated to social welfare (27.5% of total budget), National defence (15%) and education, science and culture (19.5%).

To tackle the ageing population issue, the government wants to implement policies (involving approximately 26% of social welfare expenses) aimed at encouraging births and developing long-term care services. National defence expenses are set to increase (+7.7 % compared to 2023) for the seventh consecutive year, amid rising tensions with mainland China. On 26 September 2023, Taiwan unveiled its first domestically built submarine “Narwhal” (NT$49.4 billion). The Tsai Ing-wen’s anti-nuclear party that has ruled Taiwan since 2016 is pursuing a nuclear-free energy agenda by 2025. Taiwan intends to generate 20% of its energy from renewable electricity, 30% from coal-fired power and 50% from gas-fired power. To implement this energy transition, in 2024, NT$27.3 billion has been allocated for the development of wind and solar power, and NT$34.7 billion are intended to strengthen power and energy storage systems. Another NT$6.7 billion has been allocated to encourage the use of electric vehicles. Compared to 2023, energy transition expenditures are expected to expand by 37%, the largest increase among all spending categories.

Exports were weak in 2023, but a deeper decrease in imports –exports rely heavily on imported components such as machinery and electrical equipment represent 45% of total imports – allowed the country to keep a trade surplus. We expect a gradual recovery for technology-related products in 2024 to support the current account balance. Taiwan remained the fifth-largest net creditor in the world at the end of 2022, with total external assets growing by 7.9% to US$ 2.71 trillion, generating solid income. It has one of the highest foreign exchange reserves in the world (US$ 564.01 billion with 424 tons of gold in September 2023), enabling it to cover more than 19 months of imports. Moreover, its low level of external debt (approx. 26 % of GDP) does not jeopardise the stability of the island’s external position.

Escalating geopolitical tensions

The 2024 Taiwanese general elections (scheduled for January 13, 2024) are fast approaching. The Democratic Progressive Party (DPP) has a comfortable lead in the polls. Lai Ching-te is running for the DPP given that incumbent President Tsai Ing-wen (elected in 2016 and 2020) is ineligible for a third term. The opposition is composed of Hou Yu-ih of the Kuomintang Party (KMT), Ko Wen-je (former mayor of Taipei from 2014 to 2022) of the Taiwan People's Party (TPP) and Terry Gou (founder and CEO of the assembler of iPhone Foxconn) as an independent.

One of the main topics of these elections is the country’s relationship with mainland China. The KMT, the main opposition party, accuses Tsai Ing-wen's DPP of making the situation worse by advocating Taiwan independence. China is accelerating the deployment of ballistic missiles and according to the Taiwanese Ministry of Defence, almost 380 combat aircraft per month operated around the island in October 2023. The island, for its part, has invested massively in defence spending. If a confrontation occurs, it would have a significant global impact given its indispensable role in the global semiconductor supply chain.

Last updated: October 2023