UPDATE 2-Taiwan Q2 GDP data suggests strong recovery

* Q2 annualised GDP +20.69 pct, first rise since Q1 2008

* Q2 GDP down 7.54 pct yr/yr, in line with expectations

* Government raises 2009 GDP forecast to 4.04 pct

* Government expects 2010 GDP to grow 3.92 pct

(Recasts, adds details, quotes in paras 1-2,4-10,12)

By Lee Chyen Yee and Jeanny Kao

TAIPEI, Aug 20 (Reuters) - Taiwan's economy grew for the first time in over a year in the second quarter on an annualised basis and officials said they expected rising demand from China to support a strong recovery.

Gross domestic product fell 7.5 percent in the June quarter from a year earlier, in line with expectations and improving from a record 10.1 percent contraction in the previous quarter as the steep drop in exports eased.

In a further sign of a gradual recovery seen in most of Asia, gross domestic product rose 20.69 percent in the April-June period on a seasonally adjusted, annualised basis, the government said in its first release of such a series on Thursday.

This figure projects what the growth rate over 12 months would be if the quarterly growth rate were to be sustained for a full year.

"Exports will start growing next year as demand from China is expected to be quite strong," Tsai Hung-kun, a director at the statistics agency, told a news conference.

"A sizeable amount of our exports to China gets re-exported to markets, such as the United States, where we are going to see significant demand recovery," Tsai said.

Clear signs of an economic recovery are already emerging.

In the second quarter, external demand contributed to 5.2 percentage points to Taiwan's 20.69 percent annualised growth and domestic consumption made up the rest of the 15.49 percentage points, government data showed.

In the first quarter, the tech-reliant economy's GDP had shrunk by 10.16 percent on a seasonally adjusted annualised basis as external demand contributed minus 0.28 percentage points, while domestic consumption made up minus 9.88 percentage points.

CHINA DEMAND HELPS

"Monthly records of outbound shipments have showed electronics exports and trade with China have been the main forces behind the improvements in foreign trade," said Tine Olsen, an economist at Moody's economy.com.

"The island is hence still dependent on its traditional growth engine. The improved ties between Taiwan and China are also providing a boost. As exports rebound, investments are forecast to follow suit," Olsen said.

Like the rest of Asia, economists expect Taiwan's economy to improve through the rest of the year, with annual growth likely to return in the fourth quarter, which would be the first expansion since the second quarter of 2008, analysts said.

"So far all Asian economies have seen an upside in their GDP numbers. It showed that the worst of the Asian economies is really over," said Daniel Soh, an economist at Forecast Ltd.

The 7.5 percent year-on-year drop in Taiwan's second quarter GDP was in line with analysts forecast in a Reuters poll, but still bigger than South Korea's 2.5 percent fall, Singapore's 3.5 percent decline and Hong Kong's 3.8 percent drop.

For the full year, Taiwan's economy is now expected to contract 4.04 percent, its worst performance on record but better than its May forecast for a 4.25 percent fall, the statistics agency said.

Taiwan had slipped into a recession in the fourth quarter of last year after posting two consecutives quarters of annual GDP contraction as the worst global downturn since the Great Depression dampened exports.

The weak economy has prompted the central bank to cut interest rates seven times to a record low of 1.25 percent, though it kept rates steady in March and June partly due to signs that the global economy was bottoming out.

The economy is expected to grow 3.92 percent next year, it said, with reconstruction from Typhoon Morakot, which triggered the island's worst floods in about 50 years, likely to boost government spending.

A pickup in external demand will also help the export-reliant economy. The statistics agency, putting out economic forecasts of 2010 for the first time, expects exports to rise 15 percent next year.

Taiwan's companies make 80 percent of the world's laptop computers and more than 40 percent of its liquid crystal displays, or LCDs, used in flat-screen TVs. It is also home to the world's top two contract chip makers, TSMC (2330.TW) (TSM.N) and UMC (2303.TW) (UMC.N).

With the tech sector leading other industries in a global recovery, Taiwan's exports are expected to starting seeing growth in the fourth quarter.

On Thursday, the central bank said Taiwan's second-quarter current account surplus was $9.9 billion, up from a revised $7 billion a year earlier. Taiwan's balance of payments recorded a surplus of $11.82 billion in the second quarter. LINKS: > COMMENTARY-Taiwan's GDP: what analysts say.....[ID:nTP89725] > TABLE-Details of Taiwan Q2 GDP report.........[ID:nTP199613] > For a graphic on Taiwan's GDP, please click here (Additional reporting by Umesh Desai in HONG KONG; Editing by Kazunori Takada and Andy Bruce)