How is the AI boom spreading from the technology sector to domestic demand?

  • Goldman Sachs raised its forecasts for Taiwan’s year-on-year real GDP growth in 2026 and 2027 from 11.4% and 2.9% to 11.7% and 3.3%, respectively, citing continued resilience in domestic spending and the spread of the AI boom’s effects beyond production.
  • The transmission begins with capacity expansion in the local technology supply chain. In South Korea, the initial benefits have come mainly from higher memory-chip prices and are concentrated in two large companies. Taiwan’s production expansion reaches the local supply chain more directly, supporting income and spending.
  • The upgraded forecasts still imply a quarter-on-quarter slowdown: Goldman Sachs raised its forecast for seasonally adjusted third-quarter GDP growth from 0.5% to 0.8%, but that remains below the actual 1.0% in the second quarter, as consumption and fixed investment are expected to slow somewhat from a high base.

Is the improvement in consumption driven by wages or the stock market?

  • Both are playing a role. On a rolling three-month basis through August 2026, Taiwan’s total wages rose 7.5% year on year, driven mainly by non-recurring compensation growth of more than 20%. Regular wages also grew slightly more than 3.1%, showing that the improvement in income extends beyond bonuses.
  • Real private consumption rose 5.9% year on year in the second quarter. Seasonally adjusted month-on-month growth in consumption indicators, including retail and food services, rose from 0.8% in August to 1.3% in September, supporting continued consumption momentum through the end of the quarter.
  • Goldman Sachs believes gains in technology stocks are also improving household balance sheets and confidence through ETF holdings. In the third quarter, the assets of Taiwan-listed ETFs were equivalent to 36.4% of GDP, up about 10 percentage points from a year earlier.

Why switch from expecting steady rates to forecasting hikes?

  • Credit expansion indicates that financial conditions remain loose. On a three-month average basis through August, corporate loans rose 12.4% year on year, the fastest pace since 1998, and accounted for more than half of bank loan growth. Goldman Sachs believes this likely reflects substantial capital expenditure in the technology supply chain.
  • Together with stronger wages and consumption, Goldman Sachs expects Taiwan’s central bank to raise rates by 12.5 basis points in each of three consecutive quarters starting in December 2026. It raised its year-end policy rate forecasts for 2026 and 2027 from 2.0% for both years to 2.125% and 2.375%, respectively.
  • The tightening cycle is expected to be shallow: Goldman Sachs assumes that the Federal Reserve will resume rate cuts in the second half of 2027 after a brief period of hikes. At the same time, Taiwan’s headline inflation is expected to fall below 2% by the third quarter of 2027, reducing the need for further hikes after mid-year.

Why is the New Taiwan dollar still weakening despite the growth upgrade?

  • The New Taiwan dollar depreciated about 2.5% against the US dollar over the past month. A global AI stock pullback drove net foreign selling of 26 billion US dollars in Taiwanese equities in October. TSMC’s payment of about 4 billion US dollars in dividends to overseas investors, higher oil prices that worsened the energy balance, and a wider US-Taiwan interest-rate differential also exerted pressure.
  • Goldman Sachs remains positive on the New Taiwan dollar over the medium term, citing growth, the current-account surplus and a more restrictive central-bank policy. It revised its 3-month and 6-month US dollar/New Taiwan dollar forecasts from 31.5 and 31.3 to 32.0 and 31.50, respectively, implying a weaker near-term rebound. Its 12-month forecast remains at 31.0.
  • Repatriation of funds is a potential source of support: the increase in overseas deposits, loans and receivables since the second quarter of 2025 has reached 146 billion US dollars, and Goldman Sachs believes exporters have considerable scope to bring funds home. Appreciation also carries costs: Taiwanese companies remain more sensitive to a stronger domestic currency than their South Korean peers, although improved margins and a lower share of local inputs have reduced the impact.