May 29 (Bloomberg) -- Taiwan's economy expanded faster than economists estimated in the first quarter, stoked by overseas shipments and a pickup in consumer spending.

Gross domestic product rose 6.06 percent from a year earlier, following the fourth quarter's revised 6.5 percent gain, the statistics bureau said today in Taipei. That beat the median estimate of 5.8 percent in a Bloomberg News survey of 18 economists.

Japan, Hong Kong and Malaysia have all this month reported growth rates that exceeded expectations buoyed by trade within Asia. Still, Taiwan's government today forecast the economy's expansion will cool to 4.78 percent this year from 5.72 percent in 2007, as the U.S. slowdown damps exports, while Cabinet earlier approved more than NT$160 billion ($5.3 billion) of extra spending to shore up domestic demand.

``Exports to Asia were enough to support Taiwan's economic growth and domestic consumption also improved,'' said Cheng Cheng-mount, chief economist at Citibank Taiwan Ltd. in Taipei.

Taiwan's GDP was released after the close of trading on the stock exchange. The Taiex index of shares rose 0.2 percent to 8,684.92 today, taking this year's gain to 2.1 percent, the best performance among the major indexes in Asia.

Faster-than-expected growth provides scope for Taiwan's policy makers to keep raising interest rates to quell inflation.

Taiwan's central bank has raised its discount rate on 10- day loans for 15 consecutive quarters. Policy makers most recently increased the benchmark rate by 12.5 basis points to 3.5 percent on March 27 and next meet in June.

Inflation Pressure

The statistics bureau today boosted its forecast for consumer-price inflation in 2008 to 3.29 percent from 1.98 percent predicted in February

Inflation pressure ``is something people are relatively concerned about,'' Cheng said. ``We thought the central bank might raise rates for two more times this year, but now it seems it may be more than that.''

Growth in the three months ended March 31 marks the 19th consecutive quarter of expansion in Taiwan's economy.

Consumers are stepping up spending on optimism the new government will spur growth through closer links with China.

Private consumption advanced 2.05 percent from a year earlier, quickening from a 1.89 percent gain in the fourth quarter, today's report showed.

New Government

President Ma Ying-jeou, who took office last week, has promised to ease investment rules and open up direct transport links with the mainland. Ma also pledged to increase spending on infrastructure and reduce Taiwan's jobless rate to below 3 percent from 3.92 percent currently.

An increase in Chinese tourism in the July-to-December period will add 0.15 to 0.2 percentage points to Taiwan's GDP, the statistics bureau said today. Extra government spending will add about 0.45 percentage points, it said.

``It's noticeable consumer sentiment has improved, and this probably is linked to confidence in the new administration,'' said Leong Wai Ho, an economist at Barclays Bank Plc.

Taiwan's exports climbed 17.6 percent in the first quarter from a year earlier, accelerating from the fourth quarter's 15.3 percent increase, today's report showed. Overseas shipments are equivalent to about 50 percent of the economy.

Increased exports to emerging economies have helped compensate for faltering sales to the U.S. Shipments bound for China and Hong Kong combined jumped 22.1 percent in the quarter.

`Downside Risks'

``Domestic demand and regional trade have helped offset the negative impact of the U.S. downturn'' on Asia's economies, said Sherman Chan, a Sydney-based economist at Moody's Economy.com. ``However, downside risks still outweigh upside potential amid ongoing financial market turbulence and an uncertain global economic outlook.''

Taiwan's exports to the U.S., the island's second-largest overseas market, dropped 0.4 percent in the first quarter from a year earlier. Exporters Acer Inc. and Taiwan Semiconductor Manufacturing Co. both reported a smaller contribution from the U.S. to total sales in the quarter.

``Taiwan remains among the most exposed economies in Asia to the U.S. slowdown,'' said Frederic Neumann, an economist at HSBC Global Markets in Hong Kong. Still, ``domestic demand may be coming to life on the back of the recent change in political leadership.''

To contact the reporters on this story: Chinmei Sung in Taipei at csung4@bloomberg.net; James Peng in Taipei at jpeng7@bloomberg.net.

Last Updated: May 29, 2008 05:45 EDT