UOB cuts forecast to 2.5%; RHB warns of adverse scenario as low as 1.0%-1.5% amid Middle East disruptions and tariff pressures.

Singapore's trade-reliant economy faces mounting downside risks in 2026 as major banks slash GDP forecasts and warn of sharp slowdowns if Middle East tensions and tariff conflicts persist. UOB Global Economics and Markets Research lowered its full-year 2026 GDP growth forecast to 2.5% from 3.6%, citing expectations of a flat quarter-on-quarter performance in Q2 and a more gradual expansion in the second half of the year. The revision follows a string of downgrades across the financial sector as geopolitical uncertainties compound structural vulnerabilities in the city-state's externally oriented economy.

Growth Forecasts Under Pressure

The consensus among major financial institutions reveals a widening range of outcomes for Singapore's 2026 GDP growth, reflecting deep uncertainty about the trajectory of global trade and energy markets. RHB Investment Bank Research has kept its baseline projection at 3.0% but flagged potential downside risks toward 2.5%, largely driven by elevated oil prices and weakening risk sentiment linked to geopolitical tensions. In a more adverse scenario of prolonged conflict into the second half of the year, RHB warned growth could slow sharply to between 1.0% and 1.5%. DBS Group Research maintains a 2.8% baseline forecast but acknowledged downside external risks, noting that while AI-driven demand supported trade-related sectors in Q1, growth momentum has begun to normalize.

S&P Global Ratings projects 2026 GDP growth at 3.7% in its baseline, down from 5.0% in 2025, though the rating agency has revised its forecast upward by 1.6 percentage points from prior estimates. Singapore's Ministry of Trade and Industry (MTI) upgraded the official 2026 growth forecast to 2.0%-4.0% from 1.0%-3.0% in February, citing an improved outlook for manufacturing and trade-related services driven by AI-related semiconductor demand. However, MTI cautioned that an escalation in risk-off sentiments or a sudden pullback in global AI-related capital spending could trigger sharp corrections in global financial markets.

The contrast between baseline forecasts and downside scenarios underscores the fragility of Singapore's growth trajectory. While the midpoint of official projections sits near 3.0%, the adverse scenarios from RHB suggest the economy could decelerate to levels last seen during the pandemic-era disruption, with growth as low as 1.0%-1.5% if Middle East tensions and tariff conflicts persist through the second half of 2026.

GDP Growth Forecast (%) (%)Source: Orionmano Industries

Exposure to Energy and Trade Disruptions

Singapore's vulnerability to Middle East disruptions is concentrated in its manufacturing sector, where petrochemicals account for approximately 3% of total output, expanding to roughly 15% when the broader chemicals segment is included. UOB warned that prolonged constraints on the movement of oil, natural gas, and petrochemical feedstocks through the Strait of Hormuz could trigger significant downstream effects globally. These disruptions would cascade beyond manufacturing into wholesale trade, transport and storage, and retail sectors. The latter faces additional pressure from softer inbound tourism if jet fuel costs surge, compounding existing headwinds from lingering tariff-related pressures.

RHB warned of increasing headwinds for Singapore's externally oriented sectors from Q2 2026 onward, as trade uncertainties persist alongside moderating growth in major economies. The research house expects performance to remain uneven in the coming quarters, with lingering Middle East disruptions and tariff pressures creating a volatile operating environment. Regional semiconductor exports have stayed robust, reinforcing the near-term outlook for Singapore's trade-linked sectors, but the sustainability of this momentum is questionable if energy supply constraints begin to erode manufacturing margins and disrupt supply chains.

The Strait of Hormuz chokepoint represents a particular vulnerability for Singapore given its role as a global petrochemical hub. Disruptions to crude oil, natural gas, and refined product flows directly threaten the feedstock supply for Singapore's refining and petrochemical complexes, which form a critical node in the global energy and chemicals value chain. UOB's analysis suggests that even temporary disruptions could have lasting downstream effects, as the integrated nature of global petrochemical markets means supply shocks in the Middle East quickly transmit to Asian refiners and downstream manufacturers.

Capital Flow and Financial Channel Risks

The Monetary Authority of Singapore (MAS) has identified geopolitical conflicts and re-escalation of tariff actions as potential triggers that could impair global investor sentiment and disrupt the AI investment cycle through the financial channel. In its January 2026 Macroeconomic Review, MAS noted that adverse discrete events could materialize, affecting the broader economic outlook beyond the near term. There is also the possibility of a sharp, synchronised correction in AI investment, driven by unrealised productivity gains and the inability to effectively monetise AI technologies.

Weakening risk sentiment linked to geopolitical tensions is already a factor in downside GDP revisions. RHB acknowledged that elevated oil prices and eroding risk appetite are contributing to their cautious outlook, while DBS noted that Singapore's resilience will "likely be tested as the year progresses, given its high exposure to global trade and susceptibility to external shocks." The financial channel amplifies these real-economy risks: a sudden pullback in global AI-related capital spending could trigger sharp corrections in global financial markets with potential spillovers to broader economic activity, per MTI's assessment.

If Middle East tensions persist or tariffs escalate further, Singapore's growth could slip below 2% in 2026, amplifying capital-flow volatility and compliance costs for financial firms operating in the trade-dependent city-state. The risk of a synchronised correction in AI investment—triggered by geopolitical shock or productivity disappointments—represents a tail risk that financial institutions must incorporate into their stress-testing scenarios. For Singapore's financial services sector, which has benefited from the AI-driven surge in semiconductor and electronics exports, any disruption to the investment cycle would compound the direct impacts of energy supply disruptions and trade friction.

The combination of energy supply risks, trade policy uncertainty, and financial channel vulnerabilities creates a compound risk profile that is difficult to hedge. Singapore's small, open economy leaves limited room for monetary or fiscal policy buffers. MAS has maintained its exchange-rate centred policy framework, but the scope for additional stimulus is constrained by the need to manage imported inflation from elevated oil prices. As the second half of 2026 approaches, the divergence between baseline growth projections and adverse scenarios will likely widen, forcing market participants to price in a broader range of outcomes for the Singapore dollar, interest rates, and credit conditions.