In a sign that this year will be a tough one for Asia's exporters, the government saw 2012 growth at 3.91 percent, less than the 4.19 percent it forecast late last year and the third cut since an initial forecast of 4.51 percent made in mid-2011.

Taiwan is one of the most open of Asia's exporters, with an exports-to-GDP ratio of 74 percent, making it extra-vulnerable to declines in external demand. But the government forecast remains more upbeat than the 3.2 percent median in a Reuters poll of economists this month.

"The government remains optimistic even after revising down the 2012 forecast," said Cheng Cheng-mount, economist at Citi in Taipei.

"It may be more bullish in the recovery in H2 because of stimulus policies it can make use of, such as attracting more investment from China by opening up the markets more."

The economy contracted 0.25 percent in the fourth quarter from the previous quarter, after a bleak period for many of the the hi-tech exporters that drive Taiwan's growth.

The government estimated real GDP grew 4.03 percent in 2011, less than half the 10.72 percent growth rate seen in 2010.

Companies such as smartphone giant HTC reported poor sales at the end of last year as the global slowdown sapped demand.

Orders for Taiwan's exports, a leading indicator of actual export demand, contracted in December for the first time in two years, while growth in actual exports in the month was the slowest in more than two years.

Investment was the biggest drag on the quarter, falling 19.2 percent and mirroring the drop in exports, since most private investment in Taiwan goes on its export industries.

"By industry, a number of sectors saw a YoY contraction, including manufacturing, construction, finance, insurance and real estate," said Frances Cheung, senior strategist at Credit Agricole CIB in Hong Kong.

"It is a disappointing set of data. The road ahead should continue to be tough, and we forecast 2012 GDP growth at 3.4 percent."
 
MIXED REGIONAL PICTURE

The fourth-quarter figure came amid a mixed growth picture for other Asian exporters, with Philippine Q4 GDP slightly above forecasts but South Korea's well below and Singapore's contracted, signalling it could slip into recession.

China meanwhile, Taiwan's top trading partner, posted above-forecast Q4 GDP but the pace of growth was still a two and half year low. For full coverage of Asian GDP, see .

"I don't think there will be a substantial recovery in the current quarter," said Ma Tieying, economist at DBS in Singapore.

"For us to see a substantial recovery, it would be only in the second quarter. One reason is that the global uncertainty is still there. We expect first-quarter GDP growth to decline further from the previous quarter."

Taiwan's central bank is expected to hold rates steady at 1.875 percent at its next policy meeting in March, with economists noting that the government on Tuesday revised up its forecast for inflation this year to 1.29 percent from 1.14 percent.

It did not cut rates at the last meeting in December, as some had expected, as it still saw danger from inflation. While the central bank has room to cut in March to give exporters a boost, its vigilance on prices may stay its hand.

Some economists in fact see a quicker recovery for Taiwan, especially after the ruling party was re-elected in January's presidential and parliamentary elections, pointing to stable and open relations with trading partner China.

"The continuation of government policies will be conducive to portfolio and direct investment, including foreign investors who had taken a wait-and-see approach in the lead-up to the election," said Raymond Yeung, senior economist at ANZ in Hong Kong.

"The growth outlook is more positive than the post crisis period in 2008-09."

All figures are preliminary and will be revised in about two to three weeks, when the government will give more commentary.