TAIPEI - Taiwan's economy shrank 1.29 per cent year on year in the third quarter, the government said Thursday, marking the narrowest contraction in a year.

The figure, reported by the Directorate General of Budget, Accounting and Statistics, was the clearest indication yet that the trade-dependent island was recovering from the global downturn.

"The figures are better than expected," said Shih Su-mei, head of the directorate general.

"It's because of spending and investment from the private sector, and also because of the recovery in exports," she said.

The third-quarter figure was the slimmest contraction since the economy declined 1.05 per cent in the third quarter of 2008.

In the three months to end-December, the economy was forecast to rise 6.89 per cent from a year earlier, after five consecutive quarters of shrinkage, she said.

Shih told reporters the directorate general expected the economy to contract 2.53 per cent in 2009, compared with a previous forecast of a 4.04 per cent decline.

Taiwan, which relies on exports for about 70 per cent of its economy, earlier this week reported export orders in October saw the first year-on-year hike in 13 months.