AI Is Driving Singapore GDP Growth of 5.7% but K-Shaped Economy Risks Loom

The manufacturing sector grew 12.2 per cent year on year in Q2 2026. Electronics non-oil domestic exports (NODX) surged 105.1 per cent year on year in June, while non-electronics exports contracted 2.9 per cent. The Straits Times Index hit a record high in July.

Singapore occupies a valuable position within global semiconductor and electronics supply chains. This has meant that the Republic’s externally oriented manufacturing and export sectors have been the big winners of the AI boom, thriving while some other sectors are struggling.

However, the AI boom is creating a powerful productivity and investment “super-cycle”, but history reminds us that no technology cycle lasts forever. Even if AI does transform the global economy, the investment trajectory is unlikely to be linear. Periods of exuberance could be followed by the loud pop of consolidation.

While businesses riding the AI wave are doing well, retail businesses continue to struggle with cautious consumer spending and increased foreign competition. Food and beverage operators are wrestling with rising wage, rental and utility costs.

The OCBC SME Index suggests that many smaller firms continue to face higher fuel, freight and supply chain costs on account of the Iran war. Against this backdrop, both overall collections and payments for small and medium-sized enterprises (SMEs) grew by around 19 per cent year on year in Q2 2026, partly reflecting higher costs across the value chain being passed on to downstream businesses and consumers.

If this divergence persists, Singapore risks developing a two-speed K-shaped economy, and the implications extend beyond GDP. Income inequality could widen again, undoing years of policy action, as productivity gains become increasingly concentrated among high-skilled workers and capital-intensive industries.

Diversification remains equally important. It is not sufficient to bet only on the biggest thing happening today. Singapore must continue to take bold, forward-looking bets in new and emerging areas, including biomedical sciences, green technologies, advanced services, financial innovation, regional digital trade, space technologies and other complementary, high-value trust-based services.

Full-year 2026 GDP growth is likely to surprise above the 4 per cent handle. But policymakers also need to ask how many Singaporeans feel that growth in their own daily lives and whether future generations continue to be upwardly mobile.