Singapore's upgraded economic outlook a 'bullish signal' of AI-driven expansion, but other sectors also contributing: Experts

Several economists upgraded their growth forecasts for Singapore following a strong showing in the second quarter.

SINGAPORE: Singapore’s move to upgrade its GDP forecast for 2026 signals confidence in artificial intelligence-related growth, but it does not mean that the country is overly reliant on the technology as other sectors also contribute to the overall economy, economists said.

Their comments come after the Ministry of Trade and Industry (MTI) raised its 2026 forecast to 4.5 per cent to 5.5 per cent on Tuesday (Aug 11), with the ministry flagging better-than-expected performance in the first half of the year and an expected acceleration in global AI-related capital expenditure.

"The upgraded forecast is certainly a bullish signal, largely attributable to the global AI investment boom," said OCBC chief economist Selena Ling.

But MTI also said the outlook remains weak for parts of the economy directly affected by supply disruptions from the Middle East conflict, including the chemicals cluster of the manufacturing sector.

Dampened consumer sentiments amid inflationary pressures could also weigh on the retail trade and food and beverage services sectors, said the ministry.

During a media briefing, MTI’s permanent secretary Beh Swan Gin said AI is a major contributor to the economy, but Singapore is not solely dependent on it. Economists echoed that view.

“I wouldn’t characterise Singapore’s economy as overly reliant on AI, although it is the primary growth driver right now,” said Ms Lee Yen Nee, country risk analyst at BMI, which is owned by Fitch Solutions.

She said the economy remains diversified, and some sectors not directly linked to the AI boom are growing steadily, including construction, finance and insurance, and information and communications.

“Even if the AI boom does cool significantly in 2027, it would just mark an end of an exceptionally strong export cycle for Singapore and not likely cause a crisis,” she said.

Ms Sheana Yue, senior economist at Oxford Economics, also said Singapore’s current expansion is not “solely dependent” on AI.

“The AI cycle is supporting a broader ecosystem spanning electronics, manufacturing, trade and investment, while pharmaceuticals and public infrastructure spending are also contributing to growth,” she said.

RAISING FORECASTS

With the latest report showing robust growth in the second quarter of the year, several economists have also upgraded their GDP forecasts.

Maybank analysts wrote in a note that they raised their forecast from 4.8 per cent to 5.2 per cent for this year, and from 3.1 per cent to 3.3 per cent for next year.

They noted that their projections are at the upper end of MTI’s revised forecast and implies 4.3 per cent growth for the second half of the year.

“The global AI capex boom, domestic construction boom and safe haven capital inflows remain powerful drivers that will support growth in the second half,” said Maybank, adding that manufacturing, wholesale trade, finance and infocomm are likely to remain leading growth drivers.

Ms Lee of BMI said before Tuesday’s economic report that she expected Singapore’s economy to grow 5 per cent this year. That has now been revised to 5.5 per cent to reflect stronger-than-expected momentum in the first half of 2026.

She said data points in Singapore, Taiwan and South Korea suggest that AI-related demand remains robust across the region, and major US tech companies are signalling that investment in AI infrastructure is set to continue.

“Taken together, these developments reinforce our view that growth momentum will remain supportive through the rest of 2026,” she said.

OCBC also raised its forecast from 4.3 per cent to 5.2 per cent.

Ms Yue said Oxford Economics will reassess its forecast of 4.4 per cent growth following the latest GDP report.

WEAK SPOTS IN THE ECONOMY

Despite the upgrade in the growth forecast, OCBC’s Ms Ling said MTI’s rhetoric was balanced, highlighting optimism around AI along with weakness in sectors facing Middle East-related supply chain disruptions.

MTI said the chemicals cluster of the manufacturing sector is expected to remain “the most adversely affected”, and elevated fuel costs will dampen demand in the water and air transport segments.

Ms Yue said a prolonged disruption to traffic through the Strait of Hormuz is the biggest near-term downside risk. It would keep energy and shipping costs elevated, and weigh on global trade and domestic spending, she said.

Renewed US tariff measures and a sharper-than-expected slowdown in global demand would also be risks, given Singapore’s trade-dependent economy.

On the domestic front, household consumption remains the weakest part of the economy, she added, with subdued consumer sentiment and higher living costs constraining discretionary spending.

Maybank analysts said the outlook remains weak for consumer and travel-related sectors, flagging elevated travel costs and a lukewarm labour market.

They said government support will partially cushion the impact on retail and food and beverage sectors.

The government has announced nearly S$2 billion (US$1.6 billion) of support for households and businesses grappling with the effects of the Middle East conflict.

A second package, announced in July, includes S$300 of Community Development Council (CDC) vouchers to be used at participating hawker stalls, heartland merchants and supermarkets.