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Taiwan’s AI-driven growth

The acceleration of the global AI race has driven a surge in AI-related investment and imports of ICT products from Taiwan. In the first half of 2025, Taiwan's economy grew by 6.7% yoy, with information and electronics manufacturing contributing 6.1 ppt — accounting for approximately 90% of total growth.

AI-related demand remains strong, but there are signs that the momentum may be peaking. Exports of electronic components grew 25.6% yoy in September, down from a peak of 34.6% in August. Exports of information and communication products remained strong at 86.9% but also declined from a high of 111.1% in May. Overall, total ICT exports rose 48.7% in September, lower than the 62.5% peak in May.

Similarly, Taiwan’s PMI for the electronics manufacturing sector has remained below 50 for three consecutive months, with a reading of 48.8 in September.

Outside the AI sector, the broader economy is already experiencing a slowdown. Non-ICT exports have broadly contracted, impacted by the imposition of US reciprocal tariffs since August and ongoing weak demand from China.

Domestic consumption remains subdued, partly due to a softening labor market. The number of workers placed on unpaid leave has started to rise, reflecting spillover effects from declining non-ICT exports.

Construction investment continues to decline amid an ongoing correction in the residential property market. Real estate loans still account for 36.7% of total bank lending, above the CBC’s target range of 35–36%. The central bank’s credit control measures are expected to remain in place through 4Q 2025 and into the first half of 2026.

The AI craze—and its risks

There is market optimism that the global AI race will continue to drive trade and investment in the ICT sector in 2026. Tech companies—including foundation model developers, cloud providers, and hardware firms—are rushing to secure first-mover advantages, establish technological leadership, and maintain competitiveness. Major economies such as the US and China are also racing to capture economic, political, and military leadership through AI dominance.

According to Trendforce, total capex from the eight major cloud service providers is forecast to increase 61% yoy to USD420bn in 2025, and grow another 24% yoy to USD521bn in 2026. Gartner recently revised up its global semiconductor revenue forecast, projecting robust growth of 17.8% in both 2025 and 2026.

Risks and uncertainties remain. AI technology remains in its early, immature stages, and large-scale investments carry considerable uncertainty. Gartner’s 2025 Hype Cycle for AI suggests that many AI technologies won’t reach the “plateau of productivity” until 2027–2030. Questions persist about the eventual size of the AI market and returns on investment.

While capital availability is not yet a major constraint, the scale of investment is introducing complexity in funding structures—such as private credit and “circular financing”—which reduces transparency and increases financial stability risks.

Physical infrastructure may also pose constraints. According to the IEA, electricity demand from data centers is expected to more than double to 945 TWh by 2030, growing at an annual rate of around 15%. Power supply bottlenecks could slow the pace of AI infrastructure expansion.

The AI cycle has significant implications for the semiconductor sector. Due to long lead times in foundry construction and the complexity of semiconductor supply chains, supply often lags demand. In boom periods, tech companies tend to over-order chips to hedge against supply risks, amplifying demand. If AI momentum slows, this over-ordering may reverse, causing corrections across the supply chain.

China-US trade tensions

China-US trade tensions have re-escalated, posing a risk to the global tech supply chain. On October 9, China expanded its export controls on rare earth elements, while on October 10, the US announced new measures, including a 100% tariff increase on Chinese imports and export controls on critical US software.

China’s updated restrictions added five rare earth elements to its controlled export list and broadened the scope beyond raw materials to include related technologies and equipment. Notably, foreign companies using Chinese-origin rare earths or technologies abroad will now require Chinese export licenses if the final product contains 0.1% Chinese-origin rare earths by value. Exports related to advanced semiconductor applications—such as logic chips at 14 nm or below, or memory chips with 256 or more layers—will be subject to case-by-case review.

Rare earths play an important role in the semiconductor supply chain – from EUV machines, advanced chip manufacturing, to cooling systems in data centers. China accounts for around 60% of global rare earth mining output and 90% of refining capacity. The new export controls could lead to shipment delays and increased costs. Although Taiwan does not directly rely on China for rare earths, it could experience indirect impacts from global supply bottlenecks and price fluctuations.

US semiconductor tariff risks

The US Section 232 tariffs on semiconductors present an additional risk. The US has yet to conclude its Section 232 investigation on semiconductor imports, with results expected by end-December. President Trump has floated a 100% tariff on imported chips but has also indicated that exemptions may be granted to companies that commit to building manufacturing capacity in the US. One proposal would require chipmakers to produce domestically an amount equal to their imports (“1:1 ratio”). Many policy details remain unclear, including tariff levels, product scope, implementation timeline, and exemption criteria.

In anticipation, some tech firms may have front-loaded shipments ahead of possible US semiconductor tariffs — raising the likelihood of a post-tariff correction in 2026.

Taiwan is exposed to semiconductor tariff risks. During the fifth round of Taiwan–US trade talks held in late September, Taiwan proposed a "Taiwan Model" to expand US-based investments. This model includes enterprise-led investment, financial guarantees, G2G cooperation in industrial cluster development, and infrastructure support. If an agreement is reached, Taiwan may receive preferential treatment under Section 232 and secure reductions in the 20% reciprocal tariffs. However, full tariff exemption remains unlikely, and tariff-related risks would persist, contingent on the actual implementation of US-based investments.

Forecast implications

We have revised our 2025 GDP forecast for Taiwan upward to 5.6%, from 4.0%. The 2026 forecast remains unchanged at 2.0%. The upgrade mainly reflects stronger-than-expected AI-related exports and investment in 3Q. However, we continue to expect a gradual slowdown in both areas starting from 4Q 2025 into 2026, as AI momentum peaks and tariff impacts materialize.

We have postponed the projected timing of the first rate cut by Taiwan’s central bank (CBC), from December 2025 to March 2026. The CBC is expected to lower its discount rate by 12.5 bps to 1.875% in March, followed by another cut to 1.75% in June. Stronger-than-expected 3Q GDP growth reduces the urgency for monetary easing in 2025, but we continue to anticipate rate cuts in 2026 in response to slowing growth and moderating inflation.

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