Morgan Stanley raises Taiwan's 2026 GDP growth forecast to 11.6%, expects central bank rate hike in Q4

Morgan Stanley has significantly increased its GDP growth forecast for Taiwan in 2026, projecting a remarkable 11.6% expansion, which could represent the highest growth rate in almost four decades. The financial institution also revised its 2027 growth forecast upward, from 4.7% to 7.5%.

In its latest Taiwan economic report, titled "Taiwan: Still Riding the AI Super-cycle," Morgan Stanley economists noted the sustained strong global demand for AI applications. This surge is driving Taiwan's economic growth, which is now broadening from technology exports to encompass domestic investment, the service sector, and private consumption. The combined strength of external and internal demand prompted the substantial upward revision of the growth forecasts for 2026 and 2027.

Official data indicates Taiwan's GDP grew by 15.43% year-on-year in the first quarter of 2026 and 12.92% in the second quarter, averaging 14.15% for the first half of the year – significantly exceeding initial expectations. Morgan Stanley attributes this upward revision to three key factors: continued growth in tech exports fueled by global AI demand, increased capital expenditure in semiconductors and related supply chains driven by export momentum, and improved private consumption supported by service sector recovery and policy initiatives.

The report highlights that Taiwan's growth structure is no longer solely reliant on net exports. Domestic investment and consumption are now contributing more significantly to GDP, demonstrating the expanding impact of the AI and semiconductor super-cycle on broader domestic economic activities. Exports have shown robust growth, with a 44.7% year-on-year increase in the first seven months of 2026 and a 32.9% rise in July alone, driven by demand for integrated circuits, electronic components, and information and communication technology products. Morgan Stanley forecasts full-year exports to grow by 20.7% in 2026.

Fixed investment has emerged as Taiwan's second-largest growth pillar, following net exports. Capital formation contributed approximately 4.03 percentage points to GDP growth in the second quarter of 2026, reflecting ongoing corporate expansion in machinery, factory construction, and production capacity. Morgan Stanley anticipates private investment to grow by 17.7% in 2026, with real capital formation accelerating from 12% in the first half to 23% in the second half. Data on capital equipment imports and semiconductor equipment imports further supports this trend, indicating that AI and high-performance computing demands are translating into tangible equipment procurement and capacity building.

Private consumption also showed improvement, growing by 5.38% in the first half of 2026, up from 3.45% in the fourth quarter of 2025. This growth is supported by factors such as income tax adjustments, vehicle replacement incentives, wealth effects from stock market gains, and increased spending on communications, entertainment, and overseas travel. Service sector activity and employment have also improved, with the sector growing by 13% in the first half of 2026, surpassing the previous three-year average. However, consumer confidence, while recovering, remains cautious. Morgan Stanley forecasts private consumption to grow by 3.2% in 2026 and 3.1% in 2027.

Regarding inflation, Morgan Stanley projects consumer price index (CPI) growth of 2.1% in 2026 and 2.2% in 2027, with both overall and core inflation potentially remaining slightly above the central bank's 2% threshold. Inflationary pressures are attributed to fuel prices, weather-related food price increases, rising tech product prices amid the AI boom, and sustained consumption recovery with higher wage expectations. The report suggests that expansionary fiscal policies could further boost GDP growth but may also exacerbate demand-side inflationary pressures.

Consequently, Morgan Stanley has advanced its forecast for the central bank's first interest rate hike by one quarter, now anticipating a move in the fourth quarter of 2026. The benchmark rate is expected to increase from the current 2% to 2.125%, with a further rise to 2.25% in the second quarter of 2027. The report notes that while additional rate hikes might be limited due to cooling housing market policies, the central bank may need to act preemptively and maintain higher rates for a longer duration.