Singapore’s small and medium enterprise sector is splitting along sectoral lines as the economic fallout from the Middle East conflict drives a widening gap between businesses that are riding digital and AI-driven tailwinds and those bearing the direct cost of surging energy and freight prices. The OCBC SME Index for Q1 2026 rose to 51.6 from 50.8 in the prior quarter, indicating continued expansion overall, but the headline figure masks a growing divergence beneath the surface. Retail hit a record 53.4, buoyed by robust inbound tourism, while ICT and manufacturing remained in expansion territory on the back of AI-related demand. In contrast, transport and logistics, building and construction, and food and beverage supply chains are absorbing the brunt of rising diesel, fuel, and shipping costs linked to disruptions around the Strait of Hormuz. OCBC’s Business Outlook poll found that 22% of SMEs now expect conditions to worsen over the next six months — up seven percentage points from the previous quarter — with geopolitical uncertainty cited as the primary near-term concern. RHB Research has retained Singapore’s 2026 GDP forecast at 3% but flagged a potential slowdown to as low as 1–1.5% under a severe escalation scenario. The Monetary Authority of Singapore has responded by slightly tightening monetary policy, citing expectations of higher imported inflation in the quarters ahead.
Key Overview
- OCBC SME Index (Q1 2026): 51.6, up from 50.8 in Q4 2025; expansion continues but momentum is softening
- Top-performing sectors: Retail (record 53.4), Manufacturing (51.6), ICT (51.4), Transport & Logistics (51.2)
- Sectors under pressure: Transport and logistics, building and construction, F&B supply chains — all exposed to rising fuel and freight costs
- Business sentiment: 22% of SMEs expect conditions to worsen in the next six months (up 7 percentage points QoQ)
- Top concern: Geopolitical uncertainty, specifically Middle East tensions and the Strait of Hormuz disruption
- Singapore Q1 2026 GDP: 4.6% YoY (down from 5.7% in Q4 2025); contracted 0.3% QoQ
- RHB GDP forecast: 3% base case; 2.5% if Middle East tensions persist; 1–1.5% under severe escalation
- UOB GDP forecast: Lowered to 2.5% from 3.6%
- MAS policy response: Increased rate of appreciation of the S$NEER policy band, citing rising imported energy costs
- Construction: Grew 9% YoY in Q1 2026, providing a domestic offset
- Tourism support: STB projects 17–18 million international visitors and S$31–32.5 billion in receipts for 2026
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The Headline Expansion Hides a Deepening Divide
The OCBC SME Index, which tracks business health and performance using transactional data from over 100,000 SME customers, rose to 51.6 in Q1 2026 from 50.8 in the preceding quarter. On the surface, this signals continued expansion — but the underlying picture is more complex. OCBC noted that despite the higher index reading, the share of respondents reporting actual improvements fell by six percentage points, suggesting that underlying momentum may be weakening even as the aggregate number ticks upward.
The sector-level data reveals the fault line. Retail surged to a record 53.4, driven by strong inbound tourism and stable domestic consumption. ICT posted 51.4, supported by sustained digital activity and enterprise demand for technology services. Manufacturing registered 51.6, buoyed by AI-related electronics production and precision engineering orders. Even transport and logistics posted 51.2, nominally in expansion territory but increasingly exposed to the cost dynamics that threaten to pull it back.
The problem is that these headline numbers coexist with rapidly deteriorating conditions in sectors more directly tied to physical supply chains and energy-intensive operations. Building and construction, parts of the F&B supply chain, and diesel-dependent logistics operations are experiencing real-time margin compression. OCBC highlighted that higher energy prices are lengthening delivery times, increasing working capital requirements, and raising input costs — a combination that squeezes profitability even when revenue holds steady.
The Strait of Hormuz: A Distant Conflict With Immediate Consequences
The geopolitical catalyst behind the cost pressures is the US-Israel-Iran conflict and the resulting disruption to shipping through the Strait of Hormuz, one of the world’s most critical energy chokepoints. Approximately 20% of global oil supply transits through this 21-mile-wide passage, and the escalation in early 2026 has led to tanker delays, route adjustments, and sharp oil price increases.
For Singapore — a city-state that imports virtually all its energy — the consequences are direct and unavoidable. The Monetary Authority of Singapore noted in its April 2026 Macroeconomic Review that Singapore’s imported energy costs have already risen and that prices of a wider range of imported goods and services are expected to increase in the quarters ahead. Even if Middle East supplies are eventually restored, MAS cautioned that global energy prices are likely to remain elevated for some time as deliveries lag, supply recovery takes time, and governments seeking to rebuild strategic reserves add to demand.
DBS Research estimated that if Brent crude remains around $100 per barrel, Singapore’s headline inflation could rise by approximately 1.5 percentage points while real GDP growth could be lowered by 0.4 percentage points. For SMEs operating on thin margins — particularly in transport, construction, and food services — this translates directly into higher operating costs that cannot easily be passed on to customers.
As Funding Societies noted in its analysis, even SMEs that do not import fuel directly feel the impact as cost increases ripple through transportation, manufacturing, and logistics, raising overall business expenses. Higher fuel prices lead to increased delivery costs for e-commerce operators, higher utility bills for manufacturers, and reduced margins for F&B businesses reliant on energy-intensive supply chains.
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Winners: Retail, ICT, and AI-Linked Manufacturing
Not all of Singapore’s SME economy is suffering. The sectors driving the expansion side of the index are benefiting from structural tailwinds that, for now at least, outweigh the energy cost headwinds.
Retail’s record 53.4 reading reflects the continued strength of inbound tourism. The Singapore Tourism Board reported that international visitor arrivals reached 16.9 million in 2025, a 2.3% increase over 2024, with tourism receipts hitting a record S$23.9 billion in the first three quarters. For 2026, STB has projected arrivals of 17 to 18 million visitors, generating S$31 to S$32.5 billion in receipts. Chinese tourists have been a particularly strong contributor, making up over 30% of total visitor arrivals in Q1 2026. OCBC expects Singapore’s retail sales to expand by 2% to 3% in 2026, supported by new products, experiences, and a strong events calendar.
ICT continues to benefit from enterprise digitalisation and the broader tech ecosystem in Singapore. Manufacturing’s resilience is directly tied to the global AI capital expenditure cycle, which is driving sustained demand for semiconductors and precision engineering components. The Ministry of Trade and Industry confirmed that manufacturing grew 5% year-on-year in Q1 2026, with growth driven by the electronics, transport engineering, and precision engineering clusters.
These sectors represent Singapore’s high-value, knowledge-intensive economy — the part that can absorb energy cost increases more readily because margins are higher, value-add is greater, and the direct dependence on fuel and freight is lower.
Losers: Logistics, Construction, and the Physical Economy
On the other side of the divide sit the sectors that move, build, and feed Singapore’s physical economy. These are the businesses for which diesel prices, shipping surcharges, and electricity tariffs are not abstract macroeconomic variables but daily line items on the P&L.
Transport and logistics firms face the most immediate pressure. While the sector posted 51.2 on the SME Index — technically expansionary — it is the most directly exposed to the Strait of Hormuz fallout. Shipping route diversions around the Cape of Good Hope add 10–15 days to Asia-bound tanker voyages, raising freight costs and compressing effective supply. For SMEs in last-mile delivery, freight forwarding, and haulage, the cost increases are substantial and ongoing.
Building and construction faces a different but related set of pressures. While the sector grew 9% year-on-year in Q1 2026, supported by both public infrastructure projects and private development, the cost side is deteriorating. Rising energy prices affect cement and glass manufacturing costs, while shipping diversions have caused delays of 8 to 12 weeks for European building materials with significant freight surcharges. Contractors face the prospect of mid-project cost adjustments as electricity tariffs and material prices continue to climb.
The F&B supply chain — while not broken out separately in the index — is another pressure point. Businesses dependent on imported ingredients, cold chain logistics, and energy-intensive food preparation face margin compression from multiple directions simultaneously.
The Macro Picture: GDP Slows, MAS Tightens
The SME-level divergence is playing out against a macro backdrop that is itself turning more cautious. Advance estimates from the Ministry of Trade and Industry showed that Singapore’s GDP grew 4.6% year-on-year in Q1 2026, less than the 5.4% expected by the market and significantly slower than the 6.9% recorded in Q4 2025. On a quarter-on-quarter seasonally adjusted basis, GDP contracted 0.3%, reversing the 1.3% expansion in the prior quarter.
MAS described this as an expected moderation in trade-related and modern services activity after strong late-2025 performance. But it also flagged “significant uncertainty” around the outlook for shipping through the Strait of Hormuz, noting that higher energy costs were already ramping up fuel export costs and would drag on energy-dependent industries such as petrochemicals and transportation-linked manufacturing.
In response, MAS slightly tightened monetary policy by increasing the rate of appreciation allowed under its Singapore Dollar Nominal Effective Exchange Rate (S$NEER) policy band. The move signals the central bank’s expectation that imported inflation will remain elevated over the coming quarters.
Research houses have adjusted their outlooks accordingly. RHB Research retained its 2026 GDP forecast at 3% but flagged a potential slowdown to 2.5% if Middle East tensions persist, and as low as 1% to 1.5% under a more severe escalation. UOB Global Economics lowered its full-year forecast to 2.5% from 3.6%, citing expectations of flat quarter-on-quarter performance in Q2 and a more gradual expansion in the second half.
RHB also flagged that NODX (non-oil domestic exports) growth is maintained at 3% and industrial production at 4%, but warned of downside risks in energy-intensive sectors including petrochemicals and transport-linked manufacturing — even as electronics exports remain supported by AI demand.
What Comes Next for Singapore’s SMEs
The two-speed pattern is likely to persist, and potentially widen, depending on how the Middle East situation evolves. OCBC noted that while Singapore’s SMEs have limited direct exposure to the Middle East, sustained energy inflation could transmit into broader price pressures, tightening financial conditions and increasing funding costs. For SMEs already operating with thin margins and limited pricing power, this creates a compounding challenge.
The government’s Budget 2026 has provided some relief, including enhanced CDC vouchers and U-Save rebates to help households manage cost-of-living pressures. But for businesses — particularly those in logistics, construction, and food services — the path forward depends heavily on factors beyond Singapore’s control: the duration of Hormuz disruptions, the trajectory of oil prices, and the pace at which global supply chains can adapt to rerouted shipping.
Construction activity offers one domestic offset, with the 9% year-on-year growth supported by both public and private projects. And the tourism-driven retail boom shows no signs of fading, with major events, new attractions like the Disney Cruise, and continued strength from Chinese and Southeast Asian visitor markets all providing support.
But the core message from the Q1 data is clear: Singapore’s SME economy is no longer moving as one. The businesses plugged into digital, AI-driven, and tourism-linked value chains are performing strongly. The businesses that rely on moving physical goods, burning fuel, and managing complex supply chains are absorbing costs they cannot easily pass on. How long this divergence can persist — and whether it narrows or widens — will depend on whether the geopolitical fires burning in the Middle East are contained or continue to spread.
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