Morgan Stanley Upgrades Forecast: Taiwan's 2026 GDP to Surge 11.6%! Behind the $10,000 Handout... Central Bank Hides 'Early Rate Hike' to Defuse the Bomb?

Morgan Stanley's Chief Economist for Korea and Taiwan, Kathleen Oh, and her team released a new Taiwan economic report titled 'Taiwan: Continuing to Benefit from the AI Super Cycle' on Monday (August 24), highlighting that global demand for AI applications remains robust, and Taiwan's economic growth momentum is expanding from tech exports to domestic investment, services, and private consumption.

Due to simultaneous strengthening of external and internal demand, Morgan Stanley has significantly upgraded its GDP growth forecasts for Taiwan in 2026 and 2027. The 2026 forecast has been raised from 8.9% to 11.6%, potentially marking the highest growth rate in nearly 40 years. This exceeds the 10.35% projected by the Chung-Hua Institution for Economic Research in July and surpasses the Directorate-General of Budget, Accounting and Statistics' 2025 GDP growth figure of 8.76%. Morgan Stanley also raised its 2027 GDP forecast from 4.7% to 7.5%.

Three Key Factors Behind Morgan Stanley's Upgraded Forecast

The report cites official statistics showing Taiwan's year-on-year economic growth reached 15.43% in Q1 2026 and 12.92% in Q2, with an average of 14.15% for the first half of the year—significantly higher than initial expectations.

Kathleen Oh and her team attribute the substantial upward revision to three main factors: sustained growth in tech exports driven by global AI demand, increased capital expenditure in semiconductors and related supply chains due to export momentum, and improved private consumption supported by service sector recovery and policy measures.

Taiwan's economic growth structure is no longer solely reliant on net exports; domestic investment and consumption are also increasingly contributing to GDP, indicating that the benefits of the AI and semiconductor super cycle are spreading to broader domestic economic activities.

Taiwan's Economic Growth Rate, 2001–2025. The highest was 10.25% in 2010, but 2026 could surpass it. (Source: DGBAS website)

AI Exports Remain Strong, Taiwan's Exports Grow for 33 Consecutive Months

The report also cites official data showing Taiwan's exports grew 44.7% year-on-year in the first seven months of 2026, maintaining positive growth for 33 consecutive months. In July alone, customs exports rose 32.9% year-on-year, while export orders surged 61.9% to $97.9 billion, a record high, driven by demand for integrated circuits, electronic components, and ICT and audiovisual products.

Morgan Stanley forecasts Taiwan's full-year 2026 exports will grow 20.7%. Export shipment growth may slow from around 28% in the first half to about 13% in the second half.

However, Kathleen Oh and her team believe the slowdown in export growth in the second half is mainly due to higher base effects and shipment timing, and there are no clear signs yet of an actual downturn in the semiconductor cycle.

The report notes that while Taiwan's semiconductor export volume growth may have peaked by the end of 2025, the content and value of advanced chips in export products continue to rise. Combined with sustained strong global AI capital spending, tech product shipments and nominal exports are expected to remain resilient.

Export Momentum Fuels Domestic Investment

Morgan Stanley also views fixed investment as Taiwan's second major growth pillar after net exports. In Q2 2026, capital formation contributed approximately 4.03 percentage points to GDP growth, reflecting continued corporate investment in machinery, equipment, factory construction, and production capacity.

Morgan Stanley forecasts private investment in Taiwan will grow 17.7% in 2026. Real capital formation growth may accelerate from 12% in the first half to 23% in the second half.

Taiwan's Exports to the U.S., 2022–H1 2026 (yellow area), showing a clear rise from 2024, exceeding 2024 in 2025, and this year's value surpassing last year's. (Source: CIER website)

Inflation Above 2% Threshold, Central Bank May Hike Rates Early

Morgan Stanley also forecasts Taiwan's consumer price index (CPI) will rise 2.1% this year and 2.2% next year, with overall and core inflation likely to remain slightly above the central bank's 2% threshold.

Kathleen Oh and her team attribute inflationary pressures to rising fuel prices, food price increases due to weather, higher tech product prices amid the AI boom, and sustained consumer recovery with elevated wage expectations.

Additionally, recovery in private consumption and government policy stimulus may generate additional demand, keeping inflation above 2% in 2027.

Given persistent inflation above the threshold, widening output gap, and increased fiscal stimulus, Morgan Stanley has moved forward its forecast for the central bank's first rate hike by one quarter, expecting the discount rate to rise from the current 2.00% to 2.125% in Q4 this year, and to 2.25% by Q2 2027.

The report suggests that since the domestic housing market has already cooled through credit controls and supply-side policies, the number of additional rate hikes may be limited. However, the central bank may need to act preemptively, keeping interest rates at a higher level for a longer period.

With inflation persistently above the threshold, widening output gap, and increased fiscal stimulus, Morgan Stanley expects the central bank may hike rates as early as Q4 this year. (Photo by Ko Cheng-hui)

2027 Government Budget Exceeds This Year's, Adding Inflationary Pressure

Additionally, the Executive Yuan has approved a draft central government budget for 2027 totaling approximately NT$3.93 trillion, exceeding the final 2026 expenditure of NT$3.46 trillion. The policy focus includes social welfare, domestic consumption stimulus, and defense spending, though the budget still awaits legislative review.

Social welfare spending is set at NT$1.19 trillion, a 41.1% year-on-year increase. Defense spending is projected at NT$1.12 trillion, up 17% year-on-year, equivalent to 3.01% of GDP.

The government also plans to allocate NT$235.7 billion to distribute NT$10,000 to every citizen again in 2027.

Morgan Stanley estimates that if the universal cash handout is approved, it could add approximately 0.3 percentage points to 2027's GDP growth. While expansionary budgets leave room for further upward revisions to 2027's growth, they may also intensify demand-side inflationary pressures.

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