SINGAPORE: Singapore’s economy has continued to benefit from the artificial intelligence (AI) boom, but grew at a slower pace in the second quarter of financial year 2026 (2Q26) as expansion in construction and wholesale trade eased.
The Trade and Industry Ministry (MTI) said the economy expanded 5.7% on a year-on-year (y-o-y) basis in the April to June period, slower than the 6.3% growth achieved in the previous quarter.
On a seasonally adjusted quarter-on-quarter (q-o-q) basis, the economy expanded by 1.1% – weaker than the 1Q’s 1.3% growth.
The slower pace of expansion was mainly due to sectors such as construction, which expanded by 6.2% y-o-y in the 2Q, compared with 12.9% in the 1Q.
The MTI said wholesale and retail trade, along with the transportation and storage sectors, collectively grew by 6.3% in the 2Q, moderating from the 9.3% growth in the previous quarter.
The manufacturing sector, however, continued to record robust expansion, growing 12.2% y-o-y, accelerating from the 8% expansion in the previous quarter.
MTI said that manufacturing during the quarter was largely driven by output increases in the electronics and precision engineering clusters because of strong AI-related demand for semiconductors and semiconductor manufacturing equipment, respectively.
Within manufacturing, the chemicals and biomedical clusters contracted, due to feedstock disruptions arising from the conflict in the Middle East.
On a q-o-q seasonally adjusted basis, the manufacturing sector grew by 5.3%, a turnaround from the 2.2% contraction in the 1Q.
Singapore’s non-oil domestic exports expanded by 38.4% in May compared with a year earlier, extending April’s 24.4% rise as strong AI-related demand continued to drive trade momentum.
Most analysts believe it would be difficult to outperform the pace of economic growth recorded in the 1Q unless the volatile energy markets calm down.
The economic outlook has grown even more uncertain after the recent flare-up of hostilities between the United States and Iran, putting at risk the 60-day ceasefire they agreed upon in mid-June.
Crude oil prices, which had dropped to a low of US$71 a barrel after the ceasefire deal was announced, have rebounded to levels above US$80 a barrel.
However, they are far from the peak of US$120 touched weeks after the United States and Israel attacked Iran in February.
Natural gas prices, which are benchmarked to oil, have pushed up electricity tariffs in Singapore.
The Middle East conflict has also led to shortages in crude oil and petroleum products such as petrol and diesel, contributing to contractions in the fuels and chemicals segment of the wholesale trade sector and the chemicals cluster of the manufacturing sector.
Since the outbreak of war, oil prices have surged and supply chains are in disarray with the closure of the Strait of Hormuz – through which 20% of the world’s oil consumption used to pass – dampening the outlook for trade-dependent economies across Asia, including Singapore.
Sheana Yue, senior economist at UK-based advisory firm Oxford Economics, said that while AI-related exports are set to remain the key growth driver, lagged Middle East conflict spillovers and uncertainty surrounding energy and freight cost will likely moderate second-half domestic demand and momentum.
“These lagged effects typically weigh on household spending, business investment and transport- and trade-related services in the coming quarters.
“That said, AI demand and Singapore’s embeddedness in regional supply chains should keep exports as the primary growth engine,” she said.
MTI had said the conflict has also affected the global economic outlook, with disruptions to the supply of energy and other key inputs, such as fertiliser and aluminium, amid the blockade of the Strait of Hormuz.
Core inflation – which excludes private transport and accommodation to better reflect household expenses – came in at 1.4% in May, unchanged from April.
But economists have warned that higher energy costs are expected to raise production and transport costs for a wide range of imported goods and services over time and weigh down the outlook for growth.
US President Donald Trump said the United States would resume a blockade on Iranian vessels transiting the Strait of Hormuz and charge all other cargo a 20% reimbursement fee. — The Straits Times/ ANN
