The island's gross domestic product (GDP) is now expected to expand 1.61% in 2023 from last year, the slowest since 1.47% growth in 2015, the Directorate General of Budget, Accounting and Statistics said, revising down its earlier 2.04% growth forecast.

The statistics agency now sees 2023 exports falling 9.51% from last year, compared with a 7.27% slide predicted earlier.

"Chip foundries' utilisation rate in the first quarter was only about 60%," agency head Chu Tzer-ming told reporters. "Hopefully the rate will increase once inventories become less, boosting exports."

Still, booming demand for chips used in artificial intelligence applications will help Taiwan's exports, he added.

Taiwan, home to major tech companies including the world's largest contract chip maker TSMC, has seen its exports slide amid interest rate hikes around the world in response to rising inflation and growing U.S.-China trade tensions.

In July, Taiwan's exports fell for an 11th straight month as weak demand from the U.S. and China was countered by growing momentum in AI intelligence applications. The government has said growth in exports may resume from September, though more likely from November.

For 2024, GDP is expected to grow 3.32%, the agency said, offering its first forecast for next year.

Cathay United Bank chief economist Lin Chi-chao said he though the government was being overly optimistic with its forecast for this year given the slowdown in exports.

"There's a danger the outlook could be revised down again, with pressure even to reach 1.5%" growth this year, he said.

Fitch Ratings on Friday forecast Taiwan's economy would grow 2.8% next year, assuming an upturn in tech demand towards the end of this year, but noted the island "remains vulnerable to a more pronounced global growth downturn".

The statistics office also revised downwards Taiwan's inflation outlook for 2023 to 2.14%, versus a previous forecast of 2.26%.

Taiwan's central bank holds its next quarterly rate-setting meeting on Sept. 21, where it will have to weigh its response to inflation and anaemic economic growth, having held fire at its last meeting in June.

Second-quarter GDP rose by a revised 1.36% year-on-year versus a preliminarily reading of a 1.45% expansion, the agency said, returning to growth after two quarters in a row of contraction.

(Additional reporting by Ben Blanchard and Roger Tung; Editing by Himani Sarkar and Kim Coghill)

By Jeanny Kao and Faith Hung