Economists lift Singapore’s 2026 growth outlook after Q2 GDP beats expectations on sustained AI demand

[SINGAPORE] Economists are raising their full-year 2026 growth forecasts for Singapore, after gross domestic product expanded 5.7 per cent year on year in the second quarter, comfortably beating the 5.5 per cent median forecast in a Bloomberg survey.

Maybank economists Chua Hak Bin and Brian Lee raised their 2026 GDP growth forecast to 4.8 per cent from 4.6 per cent previously, They noted that first-half growth is running at a stronger-than-expected 6 per cent year on year, given the upward revision to Q1 growth.

The economists added that the Ministry of Trade and Industry (MTI) will likely upgrade its official full-year forecast to a range of 4 to 5 per cent, from 2 to 4 per cent, when final Q2 data is released in August.

“The more measured growth momentum in the second half of 2026 partly reflects high base effects from a robust first half, while building in risks from a breakdown of the US-Iran truce and renewed closure of the Hormuz strait,” said Dr Chua and Lee.

They added that the global artificial intelligence capital expenditure boom, domestic construction boom, ample banking system liquidity and loan demand, as well as significant fiscal firepower remain powerful drivers that should continue to support growth in H2.

Maybank’s revised forecast implies growth of 3.7 per cent in H2, or a slower sequential pace of about 0.5 per cent quarter on quarter on a seasonally adjusted basis, compared with 1.2 per cent in H1.

The economists kept their 2027 GDP forecast unchanged at 3.1 per cent, and flagged that capital expenditure plans among major US hyperscalers could offer further upside to its forecast.

Bank of America analysts Ang Kai Wei and Rahul Bajoria also lifted their forecast, to 4.5 per cent from 3.4 per cent previously, placing it above the current official range of 2 to 4 per cent.

The analysts added that the July monetary policy meeting of the Monetary Authority of Singapore (MAS) was looking “increasingly live” for a policy tightening move, though its base case remains for the central bank to hold in July and tighten in October.

Other economists kept their forecasts unchanged, though these were already above the official 2 to 4 per cent range.

DBS senior economist Chua Han Teng maintained his 2026 forecast at 4.3 per cent, saying that “strong AI-driven trade-related growth, which outweighed energy headwinds, should sustain” into H2, with modern services – particularly financial services – and construction seen as key anchors.

OCBC chief economist Selena Ling also kept her forecast at 4.3 per cent, having pre-emptively raised it in anticipation of a strong Q2 showing.

RHB was the outlier, keeping its forecast at 4 per cent while flagging that growth momentum could fade in H2.

“Despite persistent external headwinds, economic activity has remained resilient, supported by robust exports and industrial production, reflecting sustained AI-driven demand,” said analysts Barnabas Gan and Laalitha Raveenthar.

They expect growth to ease in H2 as the exceptionally strong performance in H1 is unlikely to be sustained.

AI-related demand

Economists broadly expect AI-related demand for semiconductors and precision equipment to remain the key driver of growth in the coming months, even as they flag risks from a potential re-escalation of the conflict in the Middle East and a possible correction in AI-related asset valuations.

“A potential correction in AI-related markets could pose downside risks to Singapore’s highly export-oriented economy,” Gan and Raveenthar said. They noted that while current indicators point to market exuberance rather than a confirmed bubble, the 25 per cent decline in South Korea’s Kospi from its peak suggests that investors have grown more cautious on AI-related assets.

Nevertheless, OCBC’s Ling said H1’s growth “is still a strong testament to the economic resilience and agility of the Singapore economy”, pointing to the onset of the Iran war, energy price volatility and hawkish global rate expectations as headwinds the economy absorbed.

Q2 growth expanded 5.7 per cent year on year, easing from an upwardly revised 6.3 per cent in Q1, indicated advance estimates from MTI released on Tuesday (Jul 14).

On a seasonally adjusted quarterly basis, GDP rose 1.1 per cent, easing slightly from 1.3 per cent growth in Q1.

The upside surprise was driven largely by the manufacturing sector, which grew 12.2 per cent year on year, accelerating sharply from 8 per cent in Q1.

Growth was underpinned by the electronics and precision engineering clusters, on the back of strong AI-related demand for semiconductors and semiconductor manufacturing equipment.

MTI reported expansions across all manufacturing clusters except chemicals and biomedical manufacturing.

The chemicals and biomedical manufacturing clusters contracted, with the former weighed down by feedstock disruptions linked to the conflict in the Middle East.

Meanwhile, the construction sector expanded 6.2 per cent year on year, slower than the 12.9 per cent growth in the previous quarter, supported by both public and private-sector activity.

On a seasonally adjusted quarterly basis, the sector contracted 2.1 per cent, its first sequential decline since Q1 2025.

Maybank’s Dr Chua and Lee said the pullback “could be reflective of higher energy, logistics and building material costs and supply bottlenecks”. They noted that the government had rolled out a scheme to co-share half of the additional direct costs incurred for diesel and bitumen in critical public construction projects from March to May. This support could be extended beyond those months.

The services-producing industries grew 4.6 per cent year on year, easing from 6.2 per cent in Q1, while expanding at a slower sequential pace of 0.3 per cent, compared with 2 per cent previously.

Wholesale and retail trade, and transportation and storage was the leading services growth driver at 6.3 per cent year on year, moderating from 9.3 per cent in Q1.

Wholesale trade continued to be driven by the machinery, equipment and supplies segment, benefiting from strong electronics export growth on the back of the AI tailwind, while transport and storage was led by water transport.

Information and communications, finance and insurance, and professional services grew 3.9 per cent year on year in Q2, easing slightly from 4.5 per cent in the previous quarter.

Growth in finance and insurance was largely driven by the banking and insurance segments, with overall loans growing 10.5 per cent year on year in May.

The accommodation and food services, real estate, administrative and support services, and other services group grew 2.7 per cent year on year, easing from 3.2 per cent in Q1.

All sectors within the group registered growth except for F&B services, while the real estate sector expanded on the back of steady developer activity.