Economic growth tethered to ‘AI boom’ as output gap narrows to 0.7%

A sharp decline in global AI valuations could force a faster easing of growth.

The sustainability of the global artificial intelligence (AI) boom will be a key factor shaping GDP growth in 2026, alongside steady expansion in other sectors.

A sharp pullback in global AI-related investment or heightened financial market volatility could induce a faster pace of easing in growth, according to a Monetary Authority of Singapore (MAS) report.

The domestic economy’s output gap is expected to narrow slightly to around 0.7% of potential GDP in 2026, from 0.9% in 2025.

“Supply shocks, including those triggered by geopolitical developments, risk lifting imported costs,” the authority added.

MAS said the AI ecosystem is supported by two reinforcing channels. In the real economy channel, Singapore is positioned mainly in the upstream segment, including the manufacturing of semiconductors and servers that support data centres and cloud service providers.

Demand for AI-related infrastructure, including semiconductors, servers and networking equipment, is expected to continue supporting output in 2026, although at a more moderate pace than in 2025.

The financial channel connects AI ecosystem participants through investment and credit, with the authority noting that higher equity valuations have lowered financing costs for AI firms.

The manufacturing sector remains exposed to upstream segments of the AI value chain. MAS said domestic exports of servers rose 38% year-on-year in 2025, accounting for about 17% of electronics exports.

Meanwhile, non-technology segments are expected to contribute materially to growth in 2026.

The construction sector is supported by a strong pipeline of public and private projects, whilst finance and insurance activity is expected to remain underpinned by accommodative financial conditions and steady lending growth.

“Financial services should be supported by steady lending and capital market activity, while the construction sector will benefit from a continuing pipeline of public and private projects,” MAS said.

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