This article first appeared in Forum, The Edge Malaysia Weekly on February 16, 2026 - February 22, 2026

Last year, Singapore’s economic growth of 5% blew past virtually every single forecaster’s expectations — and that was after a very strong 5.3% expansion in 2024. The government has now upgraded its forecast for this year to a 2%-4% range, up by one full percentage point. It believes that key drivers, such as the rapid growth in global spending on artificial intelligence (AI) are likely to continue this year. Other official data shows that this growth has trickled down to benefit a broad swathe of Singaporeans, with median incomes rising by 6.8% in inflation-adjusted terms last year. Moreover, there is a strong pipeline of new investments in both the manufacturing and services sectors that should support growth this year and next. In addition, the external accounts remain in a large surplus, inflation is low and the government’s coffers are full, as seen by the extraordinary growth in the budget surplus.

If you are saying, it surely cannot get better than this, you are probably right. There are both short- as well as long-term reasons why the current optimism about growth prospects could turn out to be misplaced. Fortunately, the policy responses for the short-term downsides are fairly straightforward — Singapore’s carefully nurtured monetary and fiscal positions allow for substantial support in case of a cyclical downturn. Thus, it is the structural headwinds which are going to be more challenging to tackle. The Economic Resilience Task Force has sketched out some broad strategies for Singapore but one suspects that more will need to be done.

Our concern is that the coming year’s outlook hinges excessively on electronics demand. In 2025, more than half of the country’s output expansion came from either the direct impact of AI-driven demand for semiconductors and related components, which boosted our manufacturing sector, or from the indirect effects of AI in such sectors as wholesale trade. In other words, the picture would change inordinately for the worse if companies were to cut back on the quite astounding projections for capital spending on the AI revolution that they have made just in the past week.

In all likelihood, capital spending by the tech companies in early 2026 is already locked in, so the first few months of the year should see further growth in demand for our electronics sector. Fiscal measures in the US and Germany are also set to add to general global demand. The surge in investment commitments by manufacturing companies should also result in new factories beginning production and adding to economic growth in Singapore.

The question is what happens beyond early 2026 as downside risks proliferate. Equity and bond investors are becoming nervous over funding the boom in AI activities, resulting in sharp pullbacks in asset prices recently. They are also increasingly questioning how quickly the productivity benefits of all this AI spending will materialise. Our view is that we are likely to see more corrections in markets, making financing of super-ambitious capital spending plans more difficult.

There are other concerns beyond the AI capital spending boom. We expect the lagged effects of the surge in protectionism around the world to exert progressively more damage over time. There are also tremors in global bond markets as investors worry about excessive fiscal deficits in the US and Japan. Currency markets have also become more volatile as a result — and also because there are growing doubts about the fundamentals of the US dollar serving as the global reserve currency.

The breakdown in the rules-based international order also raises the chances of unexpected geopolitical shocks which could derail global economic growth. For example, US military action against Iran could trigger a region-wide crisis which disrupts the production and transport of oil, causing oil prices to spike.

In short, the global environment that appears so benign now could deteriorate later in the year. Drilling down on Singapore itself, it is worth taking note of some features of recent economic growth that make us vulnerable to such setbacks on the global front:

First, much of Singapore’s recent growth is being driven by labour force expansion rather than by productivity. Looking at the period after the rebound from the Covid-19 hit, overall output has grown by around 4% a year in 2022-2025 while the labour force has increased by about 3.1% a year. That implies a pace of productivity improvement that is not healthy enough.

Second, the boom in electronics masks areas of weakness in the economy. For example, the food and beverage sector has been contracting for the past two years while retail trade and administrative and support services appear close to stagnation. These three sectors account for a relatively small share of total output but are more significant as employers of Singaporeans. More importantly, these are also sectors where rising rental and other costs are hurting most — a potential warning sign that other sectors may eventually be hurt by these same challenges if economic conditions deteriorate.

In short, bright as the near-term economic prospects might appear, we need to be prepared for the favourable conditions that underpinned these prospects to turn abruptly. If the economy does take a hit later in the year, the good news is that Singapore has room to mount a strong counter-cyclical response. As shown in recent downturns, government spending can be quickly raised to stimulate the economy.

The more critical question is, therefore, how Singapore should respond to the longer-term structural challenges.

The Singapore government’s reputation for thinking and planning for the long term was evident in the Singapore Economic Resilience Task Force’s recent update. In essence, the task force aims at “sustaining economic growth at the higher end of the 2% to 3% average over the next 10 years”. To achieve this, it acknowledged the need for a new playbook for the Singapore economy given how the world has been changed fundamentally and unfavourably by geopolitics, technology and demographics.

The task force’s work is still evolving but it sketched out seven broad strategies to guide Singapore’s adaptation to this new world, centred on leveraging external strengths while building new engines of growth. This is to be done through investments to secure AI-enabled productivity improvements, more research and development (R&D) spending and skills upgrading.

These are all quite laudable and necessary but they do also look, feel and sound like the old playbook. In view of the drastic changes in geopolitics, trade and technology, we sense that Singapore’s eventual strategy will have to go much further, in the following key areas.

First, although the task force did not say much about immigration, the data on foreign workers shows a clear acceleration in their numbers in the past two years which we suspect will continue. While waiting for long-term strategies to play out, policymakers may believe that promoting growth through a faster expansion in the labour force is needed.

A second strategy that was hinted at is to strengthen the corporate sector. The task force spoke of helping “leading Singapore firms to expand” and of “identifying, attracting and supporting these emerging champions to use the Republic as their home base” — that is, to attract promising entrepreneurs from abroad to relocate to Singapore. Singapore has done well in attracting high-potential firms that started up elsewhere to shift their domicile to Singapore — such as Grab. This is therefore not new but we are likely to see more of it.

One area that needs more policy attention is how to build an overall ecosystem that can sustain vibrant and innovative companies. The mark of success here is not just short-term gross domestic product growth but the pace of innovations, sustained growth in productivity and efficiency and the emergence of new local companies that grow rapidly.

Those measures of successes are evident in China, South Korea and Taiwan and they tell us something about what the elements of a successful ecosystem are.

First is the ability to achieve economies of scale, quite often arising out of agglomeration effects that are seen in places such as China’s Pearl River Delta. Singapore’s small geographic size and population may appear to limit the achieving of scale. This is where a more aggressive strategy of regional integration would help. It is surprising that the task force did not say much about the region, especially when the Johor-Singapore Special Economic Zone (JS-SEZ) is slowly beginning to take shape. The JS-SEZ could potentially offer agglomeration effects that would boost Singapore’s competitive positioning. Think about it — if Singapore and Malaysia collaborated more closely, their combined economies would rank as the 20th largest economy in the world — enough to give significantly more opportunities for scaling up that domestic firms currently lack. If a successful JS-SEZ persuaded Indonesia’s Riau Islands Province to also join, the agglomeration effects would be even more sizeable.

Another approach to help local companies gain scale would be to fashion economic partnership agreements that go beyond traditional free trade agreements and comprise provisions which allow Singapore-registered companies to operate freely in Asean without the need to re-register as a local company. The Asean Business Advisory Council’s proposal for an Asean entity that would allow companies to operate relatively freely within Asean is an example.

A second aspect of successful ecosystems is a proliferation of companies (usually indigenous ones) that provide supporting services and components and which compete intensively against each other, and so develop finely honed competitiveness in costs, timeliness and quality. This is where a bigger push to develop local firms into more competitive ones could provide benefits. There needs to be a review of the schemes that are in place to help the local private sector and determine why they have had limited success.

Third, the success stories elsewhere demonstrate the important role of the government. Government support for R&D and for getting universities, research centres and private businesses to collaborate is key. Singapore needs to study why Taiwan’s Hsinchu Science Park succeeded so well while its own efforts to create a biotechnology hub did not succeed as much. Another role for the government is to fill in gaps where the market does not perform efficiently. An example is the financing system for small and medium enterprises (SMEs). Economies with vibrant SMEs have funding mechanisms that are dedicated to SMEs such as the Sparkassen in Germany. Singapore needs to learn from these success stories.

Singapore’s challenge is not that it has not tried to create such an ecosystem, it is that it has yet to pull together the elements that create an ecosystem suited to Singapore which can deliver the same successes we have seen elsewhere. It is vital that we do better on this score.

Singapore’s economic managers have done an excellent job in bringing the economy to its current position. But the world economy will be a far more unforgiving place than what Singapore’s current economic model assumes. Geopolitical rivalries will spill over into trade, investment and technological innovation. More inward-looking policies in developed economies could curtail multinational companies’ investments in places like Singapore. Ambitious cities in China, India and the Middle East will increasingly compete to draw away hub activities from Singapore.

A new economic model is needed — one where there is a strategy for deriving greater synergies from the region, where local companies no longer play just a cameo role in the Singapore story and where we pull out all the stops to create more vibrant ecosystems.

Manu Bhaskaran is CEO of Centennial Asia Advisors

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