Singapore's economy beats expectations as gov't warns of Iran war fallout

In the first quarter of the year, Singapore's economy exhibited unexpected resilience, driven by substantial demand for AI chips that countered the economic repercussions stemming from the ongoing United States-Israel conflict with Iran.

According to the Ministry of Trade and Industry, Singapore's gross domestic product (GDP) experienced a year-on-year growth of 6 percent in the first quarter, significantly exceeding the preliminary estimate of 4.6 percent.

On a quarter-to-quarter basis, GDP figures reveal a seasonally adjusted increase of 1 percent.

The growth has been attributed to robust activity in the city-state's wholesale trade, manufacturing, as well as finance and insurance sectors.

The ministry emphasized that "particularly strong AI-related demand contributed to growth within the machinery, equipment & supplies segment of the wholesale trade sector, alongside the electronics and precision engineering clusters in manufacturing," as stated in their official report.

Despite existing "downside risks" associated with escalating energy and fertilizer prices due to restricted shipping through the Strait of Hormuz, the ministry maintained its growth forecast for 2026 at a rate between 2 and 4 percent.

"The implications of these factors will likely exert pressure on global economic activity throughout the remainder of the year," the Trade Ministry noted.

Conversely, the ministry acknowledged that ongoing strong demand for AI is expected to sustain growth across regional economies this year.

Khoon Goh, head of Asia research at ANZ, indicated that the current GDP figures may not fully capture the ramifications of the Middle East crisis.

"It may become more evident in the second quarter; however, the robust performance in the first quarter establishes a strong foundation for the remainder of 2026," Goh remarked to Al Jazeera.

He elaborated, "The surge in AI-related investments is driving momentum in the manufacturing sector, and as long as Singapore's oil resources remain intact, vigorous manufacturing activities will likely propel growth forward."

As the conflict reaches nearly three months of duration, the disruption in shipping routes in the Strait—exacerbated by competing blockades from Iranian and US forces—casts a significant shadow over the global economy.

Recently, the United Nations revised its 2026 global economic growth forecast down to 2.5 percent, a decline from the previous 2.7 percent, attributing this adjustment to the ongoing conflicts.

Anthony Tay, an associate professor of economics at Singapore Management University, characterized the latest GDP figures as a source of "relief rather than celebration" for local economists who had upgraded their growth expectations amid the burgeoning AI sector.

"For the entirety of 2026, local forecasters anticipate growth around 3.6 percent, which presents a more optimistic outlook compared to previous quarters, albeit with considerable downside risks," Tay explained to Al Jazeera.

Singapore, acknowledged as one of the world’s most trade-dependent economies, holds a pivotal role in the global AI sphere as a manufacturer of semiconductors and semiconductor equipment.

Notably, the Southeast Asian nation is responsible for approximately 10 percent of global semiconductor production and about 20 percent of the world's semiconductor chip equipment manufacturing.