Taiwan closed 2025 with another emphatic burst of economic growth, driven overwhelmingly by exports, as demand linked to artificial intelligence hardware continued to eclipse a sluggish domestic economy. While the pace of expansion is expected to cool this year, the island is still on course for growth well above most forecasts according to a note from Capital Economics.

Advance figures for the fourth quarter show output accelerating sharply from the previous three months. Quarter-on-quarter growth jumped to 5.5% from 1.7%, while annual growth surged to 12.7%, a marked increase on the 8.2% recorded in the third quarter. The result comfortably exceeded market expectations and capped a year in which the economy expanded by 8.4%, its strongest performance since the rebound that followed the global financial crisis.

The composition of growth underlined Taiwan’s continued reliance on external demand. Exports rose by nearly 39% year on year in the final quarter, accelerating from an already formidable pace earlier in the year. The strength reflects sustained global investment in data centres, semiconductors and other AI-related technologies, sectors in which Taiwanese manufacturers play a central role. With order books still robust, export momentum is expected to remain strong into 2026, albeit at a more moderate rate.

By contrast, domestic demand remains a clear weak spot. Overall internal spending grew by less than 1% compared with a year earlier, only marginally better than in the previous quarter. Household consumption and public spending edged higher, but this was offset by a contraction in investment, highlighting continued caution among businesses despite buoyant headline growth.

Looking ahead, private consumption is likely to gather pace as real wages improve and government cash transfers filter through to households. However, fiscal policy may prove less supportive than in previous years. Political deadlock has delayed approval of the 2026 budget, raising the risk that government spending will act as a drag rather than a boost to growth.

Taken together, these factors point to a gradual cooling in momentum over the course of 2026. Quarterly growth is expected to slow to just under 1% on average, but the strong starting point means annual expansion could still approach 8%, well above consensus forecasts.

With inflation subdued and growth remaining robust, there is little pressure on the central bank to adjust policy. Interest rates are therefore expected to remain on hold throughout the year, even as the economy shifts from an export-fuelled sprint to a more measured pace.