Taiwan — Robust economic outlook vulnerable to political risk

Escalating tensions across the Taiwan Strait and a challenging domestic political environment raise risks to Taiwan’s economy. China’s People’s Liberation Army conducted its largest military exercises around Taiwan in more than a year in late May, following the inauguration of Lai Ching-te. Such exercises raise the risk of accidental incidents and military confrontation. Chinese cyberattacks on Taiwan remain at high levels, further straining cross-Strait relations. Domestically, growing friction between the ruling Democratic Progressive Party (DPP) and the legislature, led by the opposition Kuomintang (KMT), could hamper government stability. The legislature passed a bill in May 2024 that expands its investigative power of the administration. Although subject to an appeal to the constitutional court, the bill could impede policy implementation. 

Still, recent geopolitical tensions have not materially hindered Taiwan’s trade competitiveness or financial conditions, given its competitive advantage in the manufacturing of semiconductors and integrated circuits. Indeed, real GDP jumped 6.5% year-over-year in Q1 2024—expanding at its fastest pace in nearly three years—on the back of robust demand for artificial intelligence-related products, particularly from the US (Chart). The IMF expects real GDP growth of 3.1% in 2024 and 2.4%, on average, per year from 2025-29. However, worsening geopolitical tensions, if persistent, could accelerate efforts by technology companies and end-users to expand their manufacturing bases outside of Taiwan. Growing global macroeconomic headwinds, including the potential for a sharper slowdown in China, could also upend recent export strength. Taiwan was Australia’s sixth largest export market in 2023 and is a notable buyer of Australian resources and energy.

Taiwan merchandise exports chart