Chemicals sector bears brunt of Iran conflict so far, but MAS flags wider fallout ahead

Disruptions from the Middle East conflict have so far been concentrated in Singapore’s chemicals industries, but there is a risk its impact will broaden across the economy if the crisis persists, warned the Monetary Authority of Singapore (MAS) on Tuesday (Apr 14).

In its latest macroeconomic review, MAS said disruptions to shipping through the Strait of Hormuz are hitting the economy through two channels: a squeeze on energy and input availability, and a cost shock that compresses margins and discourages investment.

“The increased production costs may be passed through to consumers via higher prices of imports that feed into domestically produced goods and services, eroding household real incomes and dampening aggregate demand,” said MAS.

The extent of the impact varies across sectors depending on their degree of reliance on energy as an intermediate input.

Petroleum, gas and electricity, petrochemicals, basic chemicals, transportation, and water and waste services were identified as the most energy-exposed industries, as their energy inputs exceed 10 per cent of total input requirements.

These industries account for roughly 10 per cent of overall gross domestic product.

Energy shortages are also expected to cascade downstream, affecting industries that rely on suppliers in energy-intensive sectors.

MAS estimates this to be most pronounced in wholesale trade, which comprises 19 per cent of GDP, as about half of the sector’s input requirements are sourced from the energy-intensive transport and storage sector, particularly water transport services.

Effects on the wholesale trade sector have already materialised, said MAS, particularly in oil bunkering services.

Bunker fuel prices – proxied by very low sulphur fuel oil – hit historic highs in March 2026 as suppliers rationed inventory, declined new contracts and extended lead times.

Although bunkering accounts for just 5 per cent of Singapore’s total exports, MAS noted that it anchors a broader cluster encompassing marine insurance, ship finance, commodity trading, legal and arbitration services, and port operations.

Domestic-oriented sectors

Domestic-oriented sectors are also under increasing strain, with MAS warning these would likely experience mounting cost pressures and operational challenges from disruptions in upstream supplies.

Land transport operators are facing significant hikes in petrol and diesel prices. Construction firms are absorbing rising petroleum-based material costs to keep projects on schedule, while F&B operators are grappling with higher utility, plastic packaging and raw material costs.

Supply disruptions could also spill over to the output of firms reliant on upstream products from the chemicals sector, MAS cautioned.

Global artificial intelligence demand remains resilient for now, with capital expenditure growth projected across semiconductors, data centres, cloud services and AI platforms.

This should continue to support activity in Singapore’s technology-related sectors in the near term, given committed multi-year investment plans.

Yet, this could unravel if the supply of critical inputs is disrupted. Helium shortages from the Gulf could squeeze semiconductor supply, pushing up costs for servers and data centres – which are already heavily reliant on debt financing and vulnerable to any tightening in funding conditions.

More broadly, a higher inflationary environment and sustained uncertainty could impair investment sentiment across the AI ecosystem, hampering firms’ ability to fund expansion.

Rising prices

Overall, risks to Singapore’s growth are tilted to the downside, particularly if the energy crisis becomes prolonged. MAS expects GDP growth in 2026 to step down from the above-trend pace of 5 per cent recorded last year, with the slowdown being broad-based across sectors.

The output gap is forecast to average around zero per cent for the year. An updated GDP forecast, currently set at 2 to 4 per cent, will be provided in May.

The energy shock is already feeding through to prices. MAS has raised its forecasts for both core and headline inflation to 1.5 to 2.5 per cent for 2026, up from the earlier range of 1 to 2 per cent.

In response to the deteriorating outlook, the central bank announced earlier on Tuesday that it will slightly increase the rate of appreciation of the Singapore dollar nominal effective exchange rate policy band, with no change to its width or the level at which it is centred.

Inflation is forecast to climb to around 2.5 per cent in the second half of 2026, driven by higher import costs for energy feeding through to electricity and gas bills, transport costs, food and retail goods.

Even if Middle East supplies are restored, global oil prices are expected to remain elevated for some time, as damaged infrastructure takes years to repair and governments race to rebuild strategic energy reserves, said MAS.

Cooling labour market

Rising prices will in turn weigh on the labour market. As the economic outlook softens, firms are expected to turn more cautious on hiring, with the Singapore Commercial Credit Bureau’s Business Optimism Index for the second quarter of 2026 already pointing to a moderation in business sentiment.

This comes after a relatively strong 2025, when total employment expanded by 17,700 in Q4, lifting full-year gains above those in 2024.

The resident unemployment rate held low at 2.8 per cent, while full-year average monthly earnings growth eased to 4.2 per cent from 5.4 per cent in 2024.

MAS expects nominal resident wage growth to moderate further this year as hiring slows. A prolonged or deeper-than-expected slowdown could lead to a more substantial pullback in hiring plans and an uptick in retrenchments, it cautioned.

Global picture

MAS expects global growth to slow to 3 per cent in both 2026 and 2027, down from 3.5 per cent last year, with the Middle East conflict estimated to shave 0.4 percentage point off the 2026 forecast relative to pre-war projections.

Global headline inflation is expected to jump to 2.7 per cent in 2026, up sharply from 1.8 per cent last year, before moderating to 2 per cent in 2027 as weaker demand exerts downward pressure on prices.

The International Energy Agency has warned that more than 40 energy assets across the Middle East have been severely damaged, materially impairing productive capacity. As the damage to infrastructure will take years to repair, oil prices may not revert to pre-war levels even after the conflict abates.

In a worst-case scenario, a more severe and prolonged energy disruption could trigger broader financial stress – inducing disorderly corrections in asset prices and amplifying risk-off dynamics across global markets.

Countries with weaker energy, fiscal and external reserve buffers would be most vulnerable, MAS warned.

Source: The Business Times © SPH Media Limited. Permission required for reproduction.

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