Taiwan’s economy performed well in the first half of this year, with GDP growth averaging 5.8% YoY in real terms and 10.1% in nominal terms. Uncertainties have emerged in the second half due to concerns about a global slowdown, debates surrounding the AI outlook, and tightening domestic monetary and credit policies. While there are signs of softening growth momentum, we believe the overall cycle of economic expansion remains intact.

GDP growth

We are maintaining GDP growth forecast at 4.2% this year and 2.6% for 2025. Growth is expected to decelerate to around 2% YoY in 4Q, down from 5.8% in 1H and 3.4% in 3Q, before rebounding to 2.6% in 2025.

Recent data suggests that growth momentum is softening. For instance, the S&P manufacturing PMI fell to 50.8 in September, marking a five-month low. The CIER manufacturing PMI saw a more pronounced decline, dropping to 49.2, below the neutral 50 mark for the first time since May. Additionally, the CIER non-manufacturing PMI eased to 53.3, the lowest level in seven months. These slowdowns reflect a broader trend of declining global manufacturing PMIs, diminished expectations for iPhone 16 sales, and recent tightening of credit regulations by Taiwan’s central bank.

Despite the softening momentum, macroeconomic conditions are expected to remain resilient in 4Q and into 2025. The recent strong rate cut by the Fed, along with a range of monetary stimulus measures from the PBOC, have alleviated the risks of a hard landing for both the US and Chinese economies. Lower interest rate burdens in the US, combined with a revival of consumer confidence in China - evidenced by a recent stock market rally - are anticipated to support consumption demand in the world’s two largest economies. Meanwhile, the Bank of Japan has shown patience regarding further interest rate normalisation, as the yen’s rebound against the dollar reduces the risk of inflation overshooting. A more stable FX and inflation environment should help mitigate business uncertainties in Japan and restore consumer purchasing power. Together, these factors are likely to bolster Taiwan’s growth outlook over the next year via trade channels.

Key sectors

Among key sectors, the electronics sector is expected to continue its expansion into 4Q and 2025. Demand for consumer electronics may remain weak in 4Q, as consumers await the launch of more significant AI-enabled PCs and smartphones. While Apple’s rollout of Apple Intelligence in the iPhone 16 series will begin in October, significant new features for Siri and support for additional languages, including Chinese and Japanese, will not arrive until 2025. A rebound in consumer electronics demand could be expected next year, driven by further advancements in edge AI, with the full rollout of Apple Intelligence potentially triggering an iPhone replacement cycle in 2025.

Demand for HPC semiconductors is expected to continue growing in 4Q and 2025, fueled by the ongoing expansion of cloud AI infrastructure. Nvidia's recent announcement regarding the production ramp-up of its next-generation AI GPU platform, Blackwell, in 4Q has alleviated concerns about the growth of the AI server supply chain for the coming year.

The real estate sector is expected to gradually transition towards a soft landing. Taiwan’s central bank has implemented a three-pronged approach to manage real estate loans, which includes lowering the loan-to-value ratio for second, third, and high-value housing loans, raising the reserve requirement ratio, and using moral suasion to encourage banks to adopt self-regulatory measures on real estate lending. These tightening measures are relatively moderate compared to the comprehensive actions taken in 2015-2016, which included credit controls, taxes on housing and land transactions, non-self-use housing taxes, and floor area regulations. Importantly, the economy is not facing an income shock similar to those during the 2001 dot-com bubble burst or the 2008 global financial crisis, which triggered past episodes of property market corrections. During the corrections in 2001, 2008-2009, and 2015-2016, construction and real estate services activities were significantly impacted, but residential property prices fell only moderately, by 5-10%.

From a fundamental perspective, property demand is likely to remain supported by several factors. Although an aging population is leading to a shrinking working-age population, the number of households continues to grow at a rate of 1% YoY, driven by the formation of nuclear families, which bolsters demand for first-time home purchases. Despite a high homeownership rate, ongoing urbanization and stable income and employment conditions continue to support demand for home upgrades. The current tightening of credit controls by the central bank primarily targets second, third, and high-value home purchases to curb investment and speculative demand.

For the banking sector, credit risks associated with a slowdown in the property market remain limited and manageable. Due to the expansion in housing loans, Taiwan’s household debt-to-GDP ratio reached a historic high of 90% in 2023. However, household assets have also grown robustly, covering nearly nine times household debt, while financial assets (excluding real estate) cover six times household debt. The share of real estate in Taiwanese households’ total assets has declined to 28% in 2022, down from a peak of 35% in 2015. Historical data indicates that the housing loan delinquency rate has remained low, attributed to strong household balance sheets, with a peak delinquency rate of about 1.6% in 2008.

Credit risks are primarily associated with low-income housing loan borrowers and construction firms. Low-income families often rely on leverage and are relatively vulnerable; for the bottom 20% of households, their assets cover only 1.2 times their total debt, and their financial assets do not suffice to cover total debt. Additionally, construction firms typically operate with high leverage, with the average debt-to-asset ratio of 65% for TWSE-listed building material and construction companies in 2023.

Inflation and monetary policy

We are maintaining our CPI inflation forecasts at 2.2% for this year and 1.9% for 2025. CPI inflation is expected to ease to approximately 1.8% YoY in 4Q, down from 2.2% in 1H and 2.3% in 3Q, and to hover around this level into 2025.

The rise in fresh food prices in 3Q, attributed to typhoons, is expected to be temporary and should ease as weather conditions normalise. Transportation fees are projected to decline YoY in 4Q, if global oil prices remain in the USD75-85 range, aligning with underlying demand-supply conditions. Additionally, public utility prices are likely to stabilise, as the government has decided to freeze electricity prices for households while raising them by 12.5% only for industrial users in October.

We maintain our forecast that the central bank will keep the benchmark rate unchanged at 2.00% in 4Q. This approach diverges from the Fed and other major central banks.

Rate cuts would contradict the current policies of credit controls and reserve requirement ratio hikes aimed at slowing real estate loans and cooling the property market. The CBC governor also stated at the September meeting that a significant slowdown in inflation, falling below the 1.5-2.0% range, would be necessary to consider rate cuts.

Risks ahead

Geopolitics remains a critical risk to monitor in 4Q, particularly the ongoing tensions in the Middle East and the upcoming US presidential elections.

If conflicts in the Middle East escalate more than expected, we could see tighter sanctions on Iranian oil exports and potential damage to oil infrastructure. Such developments could heighten fears of oil supply disruption and drive oil prices significantly above current levels. This would increase inflationary pressures on oil-importing economies like Taiwan, negatively impacting consumer spending and GDP growth.

Regarding the upcoming US elections, a "Trump 2.0" scenario could exacerbate trade tensions. Higher tariffs on US imports would affect goods from China as well as other major trade partners, including Taiwan. Additionally, we might see increased US sanctions on Chinese high-tech companies, which could have indirect repercussions for Taiwanese semiconductor suppliers. Trump could also seek bilateral trade talks with Taiwan to boost imports from the US and address trade imbalances, while urging greater Taiwanese investments in the US to strengthen its semiconductor supply chains.


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