Iran conflict has hit inflation more than growth; MAS says any growth drag will be outweighed by AI boost

[SINGAPORE] Developments in the Middle East have so far primarily affected Singapore’s inflation, rather than its growth. And while a re-escalation in tensions could pose upside risk to inflation, this is unlikely to worsen its drag on growth, the Monetary Authority of Singapore (MAS) said.

Its negative impact on growth would be outweighed by the boost from the strong artificial intelligence demand in the near term, the central bank added in its latest macroeconomic review on Monday (Jul 27).

“Singapore’s near-term growth momentum should stay firm, supported by the sustained AI-driven tech cycle,” it said.

Core inflation, which rose in Q2, is expected to step up and stay elevated for some time before a discernible easing in H2 2027. MAS did not adjust the official forecast range.

The macroeconomic review was released just hours after MAS moved to raise the slope of the Singdollar nominal effective exchange rate policy band very slightly in the July policy review.

Middle East fears

Compared with its April policy review, the central bank said that the global growth outlook has improved modestly, despite remaining uncertainties surrounding energy markets and trade policies.

“Alternative energy supplies and inventory drawdowns have helped energy markets rebalance at less elevated price levels than initially feared, limiting the drag on growth,” MAS said.

It noted that shipping volumes through the Strait of Hormuz will likely take several quarters to return to pre-conflict levels, and disruptions to oil infrastructure will also take time to resolve.

“Nevertheless, activity at Singapore’s ports has been relatively resilient thus far, suggesting that regional shipping lanes have been largely shielded from the disruptions affecting Middle East trade routes,” it added.

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It noted that in Q2 2026, the Middle East conflict posed a drag on the oil-related sectors, but its economic impact was more than offset by robust activity in technology-related segments.

“The affected oil-related sectors – chemicals manufacturing, utilities, and wholesale of fuels and chemicals – comprise a narrower subset of industries in the energy-dependent sectors identified in the April review,” MAS said.

The authority observed that oil-related industries as a whole contracted by an estimated 11 per cent on year in Q2.

The chemicals cluster manufacturing output fell in the April to May period, as firms operated at lower run rates due to feedstock supply disruptions. Real domestic exports of oil-related products in Q2 also contracted.

But oil-related re-exports, particularly to Malaysia and Indonesia, rose markedly in Q2.

This likely reflected heightened demand from regional markets as they sought alternative supply sources, MAS said, adding that Singapore is “playing its established role as a regional redistribution hub in the oil supply chain”.

As for the energy-dependent transport and storage sector, it was supported by robust air cargo traffic, underpinned by an uptick in the flow of high-tech goods. Some time-sensitive goods from the Gulf were also diverted through Singapore.

Furthermore, robust expansion in the Republic’s technology-related sectors more than offset the weakness in oil-related industries in Q2, said MAS.

AI demand still strong

On AI-related tailwinds, the central bank said Singapore’s technology-related sectors continued to expand at an above-trend pace, underpinned by resilient global AI demand. Infocomm and consumer electronics growth was particularly notable, it added.

Global chip sales grew 113 per cent year on year in Q2, as exceptionally strong global chip demand continues to outstrip supply. While the outperformance was likely driven by the surge in memory chip prices, underlying volume growth is estimated to have also been firm, the central bank said.

Demand for chips is projected to stay robust globally, with full-year semiconductor sales anticipated to reflect sustained downstream demand as AI infrastructure buildout and model deployment gather pace.

“The global AI supercycle has, in turn, provided some support to the domestic outlook, particularly across the technology-related segments,” MAS said, adding that manufacturers anticipate better business conditions in the near term.

“The technology-related sectors’ rapid growth and large economic weight give support to the broader economy through confidence effects,” it said.

Overall, Singapore’s growth momentum is expected to be relatively firmer in the near term, with technology-related segments projected to contribute to the bulk of expansion.

Beyond AI, increasing wealth management services among banks and fund managers will help the financial sector to intermediate capital inflows, boosting assets under management alongside fee and commission incomes.

Domestic-oriented and travel-related clusters will be supported by “a strong pipeline of public sector construction projects, robust household net worth that will buffer consumption, as well as a modest uplift to visitor arrivals from large-scale events in H2”.

On the recently-imposed Section 301 tariffs, MAS acknowledged the marginally higher effective tariff rate on Singapore’s domestic exports to the US, but said export diversification and the boom in tariff-exempt electronics exports would cushion the adverse impact.

The economy’s positive output gap is now forecast to widen to 0.7 per cent of potential GDP in 2026.

Inflation stays high

In Q2, weaker rises in services unit labour cost and more moderate commercial rent increases likely contributed to easing services inflation, MAS said, also noting softer consumer spending.

Still, core inflation picked up in the quarter due to the pass-through of higher import costs and fuel prices, it said, adding that imported cost pressures should stay elevated for some time.

Oil prices are expected to remain higher than in 2025, gradually retreating over 2027.

Higher energy and electronic input costs will lift upstream and intermediate goods prices, while El Nino could raise food import prices further towards the year-end. These cost increases will continue to pass through and increase inflation in electricity and gas, transport, food, and retail and other goods, the central bank said.

Core Inflation is also expected to step up in July, reflecting Singapore’s regulated tariff hikes, as well as stronger travel-related services inflation amid higher jet fuel prices.

It is anticipated to stay elevated into 2027, before stepping down in the latter half, as imported inflation eases with the expected moderation in global oil prices.

The balance of risks remains tilted towards higher inflation, MAS said.

If energy prices surge again, inflation could pick up more strongly. Firmer demand conditions on the back of a more robust expansion in global AI-related activity and greater spillover could lead to more persistent inflationary pressures.

However, some downside risks to the global and domestic economies remain.

“An unexpected tightening in financial conditions or a pullback in AI-related investment could weigh on the sustainability of GDP growth, and in turn inflation,” MAS said.