Singapore maintains 2026 growth forecast at 2-4% despite rising downside risks from Iran war

[SINGAPORE] The Ministry of Trade and Industry (MTI) kept its 2026 full-year gross domestic product growth forecast range at 2 to 4 per cent, even as it marked that “downside risks have risen significantly as a result of the US-Israel-Iran conflict”.

This is in view of the Singapore economy’s better-than-expected performance in the first quarter, the ministry said on Monday (May 25) morning.

The Monetary Authority of Singapore said at its April monetary policy review that an update to the earlier GDP forecast of 2 to 4 per cent would be provided in May.

The latest decision comes after first quarter year-on-year growth was revised upward to 6 per cent, from the advance estimate of 4.6 per cent. It was also higher than in the previous quarter, where the economy expanded 5.7 per cent year on year.

On a quarter-on-quarter seasonally adjusted basis, the Singapore economy expanded 1 per cent, moderating from the 1.3 per cent growth in Q4 2025.

MTI previously raised its official forecast from 1 to 3 per cent with the release of 2025 Q4 and full-year figures in early February this year, before the start of the conflict.

This was based on the expectation that the strong growth momentum in Q4 2025 – largely due to the artificial intelligence investment boom – would be sustained into 2026, the ministry said.

Expansionary fiscal policies in major economies and accommodative global financial conditions were also expected to support global growth.

But the global economic outlook has since deteriorated, with the conflict in the Middle East, MTI said. The Strait of Hormuz blockade has disrupted the supply of energy and other key inputs, leading to global cost spikes that have driven up inflationary pressures.

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This is expected to erode real incomes, dampen consumption, and cause a tightening in global financial conditions, weighing on global economic activity for the rest of the year.

On the other hand, AI-related demand has remained robust and should continue to support regional economies’ growth. The US tariff outlook also remains broadly unchanged from February. The US expected to restore tariffs to the reciprocal tariff rates that were struck down, by using other trade policy tools at its disposal.

Considering these developments, MTI noted that Singapore’s external demand outlook for the year has weakened compared with in February. Equally importantly, it added, are that downside risks have risen significantly.

Higher downside risks for Singapore

First, if Middle East conflict related supply disruptions are prolonged and lead to a sustained rise in energy commodity and other key input prices, global growth could slow considerably. Second, a renewed escalation in US tariff actions could further weigh on business and household sentiments, dampening investment and spending in many economies.

Third, an escalation in risk-off sentiments – where investors look for safety in lower-risk assets amid uncertainty – or a sudden pullback in global AI-related capital spending “could trigger sharp corrections in global financial markets, with potential spillovers to broader economic activity”.

MTI said: “Against this backdrop, the outlook for the sectors in the Singapore economy that are directly dependent on natural gas and crude oil and its derivatives as feedstock, as well as outward-oriented sectors affected by energy commodity shortages and fuel cost increases, has weakened since February.”

MTI permanent secretary Beh Swan Gin said affected sectors include manufacturing’s chemicals cluster, the fuels and chemicals segment in the wholesale trade sector, and the transportation and storage sector’s air and water transport segments.

Even if an agreement on the Strait is reached, it will take time for crude oil and natural gas production facilities to come back on stream, and “there will continue to be a supply crunch for the foreseeable future”, Dr Beh said.

But he acknowledged that an agreement would lead to “positive sentiments”, and thus potentially positive market responses.

In contrast, sustained global AI-related capital spending should continue to drive growth for the manufacturing sector’s electronics and precision engineering clusters, with spillovers to the machinery, equipment and supplies segment of wholesale trade.

Outward-oriented sectors will see a mixed performance. Information and communications is expected to benefit from continued enterprise demand for AI-enabled and other digital solutions.

Tighter global financial conditions could drag growth for finance and insurance, though capital inflows amid persistent market volatility could provide some support.

Meanwhile, in domestically-oriented sectors, construction and real estate should remain supported. Retail trade and food and beverage services could be weighed down by weaker consumer sentiments, but government support measures should help to cushion the impact.

On balance, taking into account the latest global and domestic economic developments, MTI’s assessment is that the outlook for the Singapore economy in 2026 has weakened since February.

Sectoral performance

Wholesale trade, manufacturing and finance and insurance led growth in Q1, said Dr Beh.

The manufacturing sector expanded by a slower 7.9 per cent year on year in the first quarter, while the wholesale trade sector grew 11.7 per cent, faster than in Q4.

They were supported by robust AI-related demand, Dr Beh said, though he noted that supply disruptions for crude oil and its derivatives affected some segments such as the chemicals cluster.

Construction growth, at 11.8 per cent year on year, accelerated from Q4, supported by an increase in both public and private sector construction output.

For services, growth picked up year on year for retail trade, at 2.6 per cent; food and beverage services, at 0.4 per cent; finance and insurance, at 5.7 per cent; professional services, at 2.6 per cent; administrative and support services, at 1.4 per cent; and other services, at 3.6 per cent.

Dr Beh highlighted that growth in the finance and insurance sector was broad-based, with the banking, fund management and security dealing segments putting up steady performances.

In contrast, growth slowed for transportation and storage, at 1.5 per cent; information and communications, at 4.3 per cent; and real estate, at 3.1 per cent. The accommodation sector grew 6.6 per cent, the same pace as in Q4.