The global economy has remained resilient notwithstanding the Middle East conflict and the resulting oil price shock. Alternative energy supplies and inventory drawdowns have helped energy markets rebalance at less elevated price levels than initially feared, limiting the drag on growth. At the same time, the continued strength of the global tech cycle has provided an important tailwind to regional economies integrated into technology supply chains. Compared to the April 2026 policy review, the global growth outlook has improved modestly, although uncertainties surrounding energy markets and trade policies remain.

Mirroring these developments, the Singapore economy recorded strong growth in Q2, as the robust expansion in the technology-related sectors more than offset weakness in the oil-related industries. The rest of the economy also grew broadly in line with trend. The Singapore economy should continue to expand at a firm pace in the second half of this year, supported by the strength of global AI-related demand. Against this backdrop, the positive output gap is expected to widen slightly this year.

Core inflation picked up in Q2, as higher import costs and fuel prices began to pass through to goods inflation. Singapore’s imported cost pressures are likely to remain elevated for some time. Higher energy and electronic input costs will lift upstream and intermediate goods prices. In addition, El Niño is expected to raise food import prices further towards the end of the year. These cost increases will continue to pass through and increase inflation in electricity & gas, transport, food, and retail & other goods.

For 2026 as a whole, both MAS Core and CPI-All Items Inflation are projected to average 1.5–2.5%. MAS Core Inflation is expected to step up in July following the increase in electricity and gas tariffs, and remain elevated into 2027. However, inflation should ease more discernibly in the latter half of next year alongside a gradual retreat in global energy prices.

Inflation could pick up more strongly than expected if energy prices surge anew. A more robust expansion in global AI-related activity and greater spillovers to adjacent domestic industries could also generate firmer demand conditions, leading to more persistent inflationary pressures.

Nevertheless, some downside risks to the global and domestic economies remain. An unexpected tightening in financial conditions or a pullback in AI-related investment could weigh on the sustainability of GDP growth, and in turn inflation.