SINGAPORE: Despite a weakening of the economic outlook in the months ahead and “significant” downside risks arising from the Middle East conflict, Singapore will maintain its 2026 economic growth forecast at 2 to 4 per cent due to a better-than-expected performance in the first quarter.
The economy grew by 6 per cent on a year-on-year basis from January to March, extending the 5.7 per cent expansion in the previous quarter, the Ministry of Trade and Industry (MTI) said on Monday (May 25).
“Nonetheless, downside risks to Singapore’s economic outlook have risen significantly and MTI will continue to monitor developments closely and adjust the gross domestic product (GDP) growth forecast over the course of the year if necessary,” said the ministry.
This represented a 1 per cent growth on a quarter-on-quarter basis, slowing from the 1.3 per cent growth in the previous quarter.
The growth is driven by strong performance of the wholesale trade, manufacturing, and finance and insurance sectors.
“In particular, robust artificial intelligence-related demand led to growth in the machinery, equipment and supplies segment of the wholesale trade sector, as well as the electronics and precision engineering clusters within the manufacturing sector,” said the ministry.
Meanwhile, growth in the finance and insurance sector was broad-based, with steady performance in the banking, fund management and security dealing segments.
On the other hand, the higher prices of and shortages in crude oil and its derivatives arising from the Iran war contributed to contractions in the fuels and chemicals segment of the wholesale trade sector and the chemicals cluster of the manufacturing sector, the ministry said in its latest economic survey.
In February, MTI upgraded Singapore’s growth forecast for 2026 to 2 to 4 per cent from 1 to 3 per cent as it had expected strong growth momentum in the fourth quarter of 2025, due in large part to the AI investment boom, which would be “sustained into 2026”.
At the time, global financial conditions were expected to support global growth, but since then, the global economic outlook has deteriorated with the onset of the conflict.
Disruptions to the supply of energy and other key inputs, such as fertiliser and aluminium, due to the blockade of the Strait of Hormuz have led to a spike in global energy and other input costs. This has driven up inflationary pressures, said the ministry.
SIGNIFICANT DOWNSIDE RISKS IN GLOBAL ECONOMY
On balance, Singapore’s external demand outlook for the year has weakened compared to February.
The ministry said downside risks to the global economy have “risen significantly” since then.
“If disruptions to the global supply of energy and other inputs arising from the conflict in the Middle East are prolonged and lead to a sustained rise in energy commodity and other key input prices, global growth could slow considerably,” said MTI.
A renewed escalation in US tariff actions could also affect investment and spending in many economies.
There is also the risk of a “sudden pullback” in global AI-related capital spending, which could trigger sharp corrections in global financial markets, with potential spillovers to broader economic activity, said the ministry.
Nevertheless, sustained AI-related spending “should continue to be a key driver” of growth for the electronics and precision engineering clusters within the manufacturing sector, and AI is also expected to lead to positive spillover effects on other parts of the economy.
On a sectoral basis, the ministry said the outlook for outward-facing industries as well as those directly dependent on natural gas, crude oil and feedstock has weakened since the outbreak of war, with several petrochemical and specialty chemical firms having declared force majeure.
At the same time, higher fuel costs have dampened the demand outlook for the air and water transport segments of the transportation and storage sector.
As for the domestically oriented sectors, the ministry noted that weaker consumer sentiments could pose a drag on spending, which would affect the retail trade and food and beverage services industries.
“The earlier disbursement of the Community Development Council (CDC) Vouchers in June 2026 and enhancement to the Budget 2026 Cost-of-Living Special Payment should help to cushion the impact,” MTI said.
Official data released on Monday also showed that Singapore’s non-oil domestic exports expanded 9.6 per cent in Q1, led by the electronics segment with growth of 57.8 per cent.
Enterprise Singapore raised its export growth forecast to 3 per cent to 5 per cent, up from 2.0 per cent to 4 per cent, on what it said was resilient AI-related demand.
Risks to Singapore from US trade tariffs also remain, however, with the city-state among countries subject to the Trump administration’s section 301 investigations.