Middle East tensions raise inflation risks whilst GDP growth impact seen limited: analysts

With 55% of crude oil sourced from the Middle East, every price jump hits the CPI—but the broader economy is holding firm.

The ongoing tensions between the US and Iran are seen to have limited direct impact on Singapore’s economic growth, analysts said.

In an analysis, UOB Global Economics and Markets Research said the “macro impact of the ongoing Middle East conflict is likely to be more pronounced on inflation than on growth in the near term.”

It estimates that around 7% to 8% of the overall CPI basket is directly affected by oil and gas prices, covering components such as electricity, gas, petrol, point‐to‐point transport services, and airfares.

“On balance, this implies a higher likelihood— ceteris paribus—that MAS will tighten policy at the Apr 2026 MPS (our base case) by raising the S$NEER [Singapore dollar] band slope by 50bps to 1.0% p.a., although there remains a possibility that policy normalisation could be deferred to the Jul 2026 MPS,” UOB said.

Deputy Prime Minister and Minister for Trade (MTI) and Industry Gan Kim Yong has said that the Middle East conflict may lead to the reassessment of Singapore's gross domestic product (GDP).

MTI earlier upgraded its GDP growth forecast for 2026 to range between 2% to 4% from 1% to 3%.

RHB said in its analysis that it maintains its full-year GDP forecast for Singapore at 3.0%. It noted that the ongoing tensions are expected to have a limited direct impact on the domestic economy as it maintains relatively low exposure to the region in terms of trade and tourism.

“However, in a worst-case scenario of full-scale military conflict, Singapore’s economy could negatively impact inflation and overall economic growth. The disruptions in oil supply from the Middle East region might lead to increased oil prices, impacting production costs and consumer prices,” RHB said.

Senior Minister Lee Hsien Loong has said that the conflict involving the US, Israel, and Iran is expected to affect energy prices and impact countries beyond the Middle East, including Singapore.

With Singapore sourcing up to 55% of its crude oil from the Middle East, UOB said the city-state is at a medium level of vulnerability. Every S$12.80 (US$10) per barrel rise in oil could add 30 bps to 40 bps to core inflation, even with a firm S$NEER, it warned.

“Whilst we remain optimistic about Singapore’s export performance in 2026, we continue to exercise caution amidst evolving global and regional developments,” RHB said.

Separately, from the domestic front, Singapore’s retail climate is expected to remain firm at least into the first half of 2026, supported by a resilient economic backdrop, festive activities and a stable labour market.

“With that, our full-year projection for retail sales is maintained at 2.0% for the year ahead,” RHB said.