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(Bloomberg) — Singapore upgraded its economic growth forecast for this year as the artificial intelligence boom lifts trade, offsetting the drag from continued fighting in the Middle East.

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Gross domestic product is expected to come in at 4.5%-5.5% this year, the Ministry of Trade and Industry said on Tuesday, raising the 2%-4% estimate it set back in February before the outbreak of the war in Iran.

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The upward revision comes as GDP grew 5.9% in the second quarter, above the government’s advance estimate of 5.7% and the median 5.8% forecast in a Bloomberg survey. It eased from the 6.3% notched in the January-March period.

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“The global AI investment boom has been stronger than expected,” MTI said in a statement. “For the rest of the year, a further acceleration in AI-related capital expenditure is expected to lift the growth prospects of economies plugged into the global technology value chain.”

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The trade-reliant city-state has found itself in the crosswinds of both the tech boom and the impact of the Iran war. The surge in global AI investment has lifted technology-related exports, while the spike in crude costs has hit energy-intensive sectors.

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Manufacturing and wholesale trade were the main growth drivers last quarter, expanding 12.5% and 8.3%, respectively, as robust AI demand lifted Singapore’s electronics, precision engineering and machinery sectors.

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Strong credit growth also helped boost finance and insurance. All services sectors expanded except for food and beverage, which shrank 1.5% last quarter, partly due to a decline in visitor arrivals.

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“The economic impact of the conflict in the Middle East has also been less severe than initially feared,” the ministry said in the statement, adding that the drawdown of oil inventories and substitution to alternative energy sources have capped the rise in global energy prices.

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However, energy prices are expected to remain elevated in the second half of the year on the back of continuing tensions in the Middle East, alongside lower levels of global oil inventories.

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In anticipation, the government has nearly doubled its support package, including cash vouchers, grants and rental assistance, to help households and businesses defray higher costs.

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The MAS has also delivered back-to-back policy tightening to contain rising price pressures, warning that inflation is likely to pick up from July and stay elevated through mid-2027.

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Prime Minister Lawrence Wong on Saturday said Singapore’s growth momentum is expected to continue. The premier said the city-state has benefitted from the rapid growth of AI while the broader geopolitical environment remains uncertain.

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On a seasonally adjusted basis, the economy grew 1.4% from the previous quarter, beating the 1.2% estimate.

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“On balance, taking into account these developments and the GDP performance of the various economies in the second quarter, Singapore’s external demand outlook for the year has improved compared to the assessment in May,” the ministry said.

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