After a Strong 2025, Taiwan’s Economy Faces Pressure in 2026

Taiwan's economy in 2025 has been one of the standout performers globally, propelled by the explosive demand for artificial intelligence (AI) and advanced semiconductors. As a critical node in the global supply chain, particularly through companies like TSMC, Taiwan capitalized on the AI boom, driving unprecedented export growth and economic expansion.Through October 2025, exports surged 32% year-on-year, fuelled primarily by high-demand of semiconductors essential for AI, cloud computing, and U.S.-centric supply chains. This led to a doubling of the trade balance from $67 billion to $122 billion, equivalent to more than 15% of GDP—one of the largest current account surpluses relative to GDP worldwide.The impact of U.S. tariffs on high-end chips proved minimal, given their irreplaceable role in advanced technology. In fact, the United States solidified its position as Taiwan's largest export market, with its share of export orders rising from 30% in 2021 to 36% by October 2025. Conversely, the share of exports to mainland China declined sharply from 25% to 17%, reflecting stagnant domestic demand there, Beijing's push for self-sufficiency in legacy chips, and ongoing export controls.This export-led surge translated into robust GDP growth of approximately 7.2% for the full year 2025—the highest in over a decade. The semiconductor sector's dominance supported broader economic resilience, with AI-related applications continuing to drive investment and production.Consumer price inflation appears to have remained contained, with consumer price index (CPI) averaging around 1.7%, and decelerating mildly amid stable global energy prices and managed domestic demand. And yet, stagnant wages, notwithstanding the strong growth and the general perception of higher inflation that officially recorded are hurting households in terms of disposable income, except for those with exposure to the stock market.Furthermore, beneath the headline economic strength, structural divergences keep on growing. In particular, the economy is exhibiting a K-shaped recovery, with an overheated tech sector with soaring valuations and growing risks of bottlenecks for energy, water and talent attraction.At the same time traditional industries—such as electrical machinery, transports, and chemicals—are lagging due to softer global demand and increasing competition, especially from China.  The weakness of traditional industries explains how much the Central Bank of China  has toned down the Taiwan dollar, which has remained weak even after having suffered bouts of appreciation in May and, again in November.These dynamics set the stage for 2026, where growth is expected to decelerate but still within a very resilient level of 4% thanks to the continuation of the AI boom. Semiconductor demand for AI and cloud infrastructure should continue supporting exports, though at a much more moderated pace as global inventories have been piling up. Taiwan's irreplaceable position in advanced nodes will likely sustain its edge in 2026, with U.S. partnerships deepening further. And yet, the risk of other players leapfrogging other technologies, whether in the US or in China will continue to grow.Beyond the general risk from AI, 2026 will bring other external and domestic challenges. Taiwan's current account surplus—among the world's largest at over 15% of GDP—will draw heightened international scrutiny, potentially fuelling accusations of undervaluation and calls for currency rebalancing. Despite the pressure, the Taiwan dollar is projected to stay stubbornly weak, ending the year around 31 USD/TWD, as the Central Bank of China (CBC) prioritizes exporter competitiveness, increases outward investments, and manages the impact of the financial sector’s  large overseas exposure (especially lifers) and the impact of a potential appreciation on their solvency ratios.The economy's dual nature will intensify, with traditional sectors continuing to suffer from potential appreciation risks, competition from China in mature nodes, and sluggish global demand outside tech. This divergence risks hindering spillover to domestic consumption, leaving growth overly reliant on exports.Overheating in the tech-driven segments will create additional inflationary pressure notwithstanding the very low official consumer price inflation. Hidden costs—such as rising wages in high-tech, asset bubbles, and supply chain strains—may not fully reflect in headline figures, posing upside risks to price stability. The CBC is likely to maintain a cautious stance and not to follow the Fed for each of its cuts and yet some cuts are bound to happen so that the Taiwan dollar does not suffer from further appreciation pressure.A key positive development expected early in 2026 is a bilateral deal with the United States. Building on 2025's joint statement and ongoing negotiations, Taiwan is poised to secure lower tariffs on certain exports in exchange for substantial foreign direct investment (FDI) commitments into U.S. semiconductor, tech facilities as well as energy (specially LNG plants).Overall, Taiwan's 2026 economy should prove rather good, buoyed by the enduring AI tailwind and strategic U.S. ties. However, managing the world's largest relative surplus, a persistently weak currency, widening sectoral divides, and understated inflation will test policymakers. Sustained reforms to broaden growth drivers—beyond semiconductors—will be crucial for Taiwan’s long-term stability.*This is a reprint. This article was also published by CommonWealth Magazine./article/article.action?id=4515