Taiwan’s manufacturing conditions index rises to 64.1%, but soaring costs pose challenges

Taiwan’s manufacturing and services sectors strengthened in the first half of 2026, but rising input costs and geopolitical risks could complicate growth, according to recently released economic indicators.

Manufacturing rebounds, costs remain elevated

Taiwan’s manufacturing sector showed a pronounced improvement in the first half of 2026, according to data presented at a July 24 event hosted by the Chung-Hua Institution for Economic Research (CIER), a leading economic policy think tank in Taiwan.

At the event, CIER presented its latest semiannual survey of purchasing managers, covering first-half operating conditions and the outlook for the second half, as well as the impact of the US-Iran war on industries and business decision-making.

The Manufacturing Business Conditions Diffusion Index, a survey-based gauge of operating conditions, rose from 49.8% to 64.1%, signaling a substantial strengthening in business activity, per CIER.

CIER stated that 17.6% of manufacturing companies have already entered the TSMC or semiconductor supply chain, and another 10.6% plan to do so.

The Employment Index also recovered to 52.4%, indicating improving demand was beginning to translate into firmer labor-market conditions.

Yet the recovery came with a significant caveat: Costs are rising sharply. The Prices Diffusion Index climbed to 87.3%, while average procurement prices rose by 13.8%.

CIER stated that the figures underscore the delicate balance confronting Taiwanese manufacturers, which remain deeply integrated into global supply chains while navigating volatile commodity prices, geopolitical uncertainty and the restructuring of international production networks.

Services remain resilient

Taiwan’s non-manufacturing economy also demonstrated resilience.

CIER said 29.2% of non-manufacturing companies already serve or plan to serve TSMC or other semiconductor clients. Another 26.8% indicated that AI and semiconductor demand had driven changes in service demand, customer composition, or investment strategies, while 17.2% have established or plan to establish service locations in the United States.

CIER said semiconductor growth was already benefiting non-manufacturing businesses in logistics, engineering, professional services, finance, and distribution.

The sector’s Operating Conditions Diffusion Index stood at 63.6% in the first half, while its Employment Index reached 57.2%. CIER said the outlook for the second half was even stronger.

The Diffusion Index is projected to rise to 66%, while the profit margin index is expected to reach 59.4%, accompanied by continued growth in employment demand.

Looking further ahead, expectations remain broadly positive. The Manufacturing Operating Conditions Diffusion Index for the coming year rose to 66.5%, while the corresponding non-manufacturing index reached 69.8%.

These figures suggest that Taiwan’s economic momentum is not confined to its globally prominent technology and manufacturing sectors. Services are also expected to provide an important underpinning for growth as businesses adapt to a rapidly evolving economic landscape.

Growth holds firm as inflation edges higher

The broader macroeconomic picture remains robust.

CIER President Lien Hsien-ming (連賢明) said Taiwan’s economy grew 14.55% year on year in the first quarter, while CIER forecasts 10.96% growth in the second quarter, supported by “extremely strong” exports.

Lien attributed the strength to continued demand for AI-related products from major US tech companies, which drove Taiwan's exports in the first half of the year to far exceed expectations.

He added that if current trends persist, annual merchandise exports could exceed US$900 billion, and that the exceptionally strong growth in the first half could be followed by a more stable expansion in the latter part of the year.

Inflation, however, has become a more salient concern. CIER has revised its forecast for the 2026 Consumer Price Index (CPI) increase to 2.02%, from 1.98% previously.

CIER said the revision largely reflects higher international oil prices and energy costs amid conflict in the Middle East, highlighting the vulnerability of an import-dependent economy to external shocks.

The test ahead

For Taiwan, the challenge in the second half of 2026 is clear.

CIER and the National Development Council, Taiwan's top economic planning agency, said the key test is whether businesses can secure key customers and materials, pass rising costs on to clients, forge strategic alliances and develop cross-regional service capabilities amid supply-chain realignment.

CIER stated that companies will also need to integrate AI into their operations in ways that generate measurable productivity gains.

Taiwan’s latest indicators thus present a picture of an economy with considerable momentum, but one navigating increasingly complex headwinds.

The trajectory through the remainder of 2026 may depend less on the strength of demand alone than on how effectively Taiwanese companies convert technological advantages and supply-chain resilience into sustainable growth.