Taiwan’s economic momentum, driven by demand for artificial intelligence (AI) products, remains strong, with booming demand for advanced semiconductors, servers and key components. In the first quarter, GDP expanded 14.55 percent year-on-year, the second consecutive quarter of double-digit percentage growth and accelerating from the 12.95 percent expansion in the previous quarter, the Directorate-General of Budget, Accounting and Statistics (DGBAS) reported on Friday.
Net exports remained the dominant driver of growth, contributing 10.33 percentage points to Taiwan’s GDP growth in the first quarter. That came as exports rose 35.76 percent year-on-year in the first quarter, outpacing 26.34 percent growth in imports, the DGBAS said. Meanwhile, domestic demand — including private consumption, government spending and investment — also improved, contributing 4.22 percentage points to GDP growth in the quarter. That reflected a 4.74 percent annual increase in private consumption and a 4.06 percent rise in government spending, while gross capital formation increased 5.92 percent, the agency said.
As AI development has evolved from model training and conversational AI to inference, agentic AI and edge devices, major cloud service providers and AI infrastructure builders need more computing power, which triggers demand for AI hardware, including high-end chips, servers and critical components, which Taiwan excels at producing. With this structural boost to the nation’s exports, along with steady growth in private consumption and domestic investment, Taiwan’s economy is forecast to grow 9.64 percent this year, with projected growth of 12.65 percent in the first half and 6.94 percent in the second half, the DGBAS said.
Even as Taiwan’s economy is forecast to achieve its fastest growth in 16 years and local equities sit near record levels, the nation is not without risks. The central bank on Friday released its latest financial stability report, which indicates that geopolitical conflicts, uncertainty over US tariffs, weakness in the Chinese economy, monetary policy adjustments in major economies and risks associated with rapid AI development remain major challenges for Taiwan.
It was the first time the central bank had devoted a box to AI-related industry investment growth and valuation risks in its financial stability report. Rising adoption of agentic AI is further accelerating computing demand, while policy support and corporate competition continue to drive expansion in data centers and AI infrastructure around the world, even though the AI industry is facing growing criticism over its high valuations and uncertain profit prospects, as well as increasingly complex circular deals and off-balance-sheet financing schemes.
Undoubtedly, the AI investment boom has encouraged many people to jump into stock investing, and a fear-of-missing-out mentality has even created a significant concentration of market funds in a few AI-related stocks. However, just as the central bank cautioned in the report, if AI-related companies’ earnings fail to meet expectations, if the macro environment becomes unfavorable or if geopolitics-driven supply chain disruptions re-emerge, the excess market concentration could amplify fluctuations and cause substantial corrections in the broader market, with the pain likely to be greater than expected.
In addition, while government data showed that the AI boom has driven more frequent capital inflows and outflows by foreign institutional investors in the market, that has created accompanying financial vulnerability. In its report, the central bank said that if market sentiment reverses suddenly or global risk aversion intensifies, a massive selloff by foreign investors could negatively affect the value of the New Taiwan dollar and heighten pressure on domestic liquidity, further destabilizing the financial system.
The report also flagged risks from rising AI investment leverage, as excessively leveraged investing would exponentially magnify volatility. What the bank did not say was that, in a market downturn, excessive leverage could lead to forced liquidation, stranded assets and heavy debt burdens.
The central bank’s cautious remarks came as Taiwanese stocks continued to surge on enthusiasm surrounding AI, as daily trading volume of more than NT$1 trillion (US$31.87 billion) on the main exchange became the norm. That has sparked concerns among investors and analysts about market overheating and a potential near-term AI-driven bubble.
On a positive note, trends in the first quarter — such as Taiwan’s strong corporate earnings, a large current account surplus and slowing capital outflows to overseas fixed-income securities — justify the TAIEX’s rally this year, while a semiconductor supercycle and strong fundamentals, accompanied by ample liquidity, suggest that the market might not collapse as quickly as in the past. Even so, smart investors need to stay on high alert for shifts in market sentiment, as the history of the capital markets has repeatedly proven that the peak comes when everyone is cheering.
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