Singapore has once again raised its economic growth projection for this year, driven by the artificial intelligence boom that is bolstering trade and manufacturing, offsetting the drag from ongoing Middle East conflicts.

The Ministry of Trade and Industry said on Tuesday that it now expects gross domestic product (GDP) to grow between 4.5% and 5.5% in 2026, up from the 2% to 4% range forecast in February before the Iran war erupted. This marks the second upward revision, after an initial estimate of 1% to 3% last year.

The upgrade comes as Singapore's second-quarter GDP expanded 5.9% year-on-year, surpassing the government's preliminary estimate of 5.7% and the median forecast of 5.8%. However, the pace slowed from the 6.3% growth recorded in the first quarter.

The ministry stated: "The global AI investment boom has been stronger than expected. In the remaining months of this year, AI-related capital expenditure is likely to accelerate further, boosting the growth outlook for economies integrated into the global tech value chain." Singapore accounts for about 10% of global chip output and 20% of the world's semiconductor manufacturing equipment production.

Meanwhile, the ministry noted that the impact of the Middle East conflict on the economy has been "less severe than initially feared," with oil inventory releases and increased use of alternative energy limiting the rise in global energy costs.

"This is a major upward revision by the ministry. We had anticipated the growth forecast would only be raised from 2%-4% to 3%-5%," said Euben Paracuelles, an economist at Nomura Holdings. "It suggests the Singapore economy has grown at a significantly above-trend pace for the third consecutive year."

In the latest quarter, manufacturing and wholesale trade were the main engines of growth, expanding 12.5% and 8.3% respectively. Strong AI demand boosted Singapore's electronics, precision engineering, and machinery industries. Robust credit growth also drove expansion in the financial and insurance sectors. All service industries grew except for food and beverage, which contracted 1.5% in the quarter, partly due to a decline in tourist arrivals.

On a seasonally adjusted basis, Singapore's economy grew 1.4% in the second quarter from the previous quarter, above the 1.2% estimate.

"The key question going forward is whether AI-related growth drivers can spread to more domestic-oriented industries," said Jonathan Koh, an Asia economist and foreign exchange analyst at Standard Chartered Bank. He believes broader spillover effects would make Singapore's economic expansion more sustainable but could also intensify wage and price pressures.