The Narrow Safety Net

Resilience is usually a comforting word in markets. It suggests that economies are holding up, businesses are still investing, households are still spending and policymakers still have room to respond if conditions worsen. After a year shaped by geopolitical risk, energy volatility, tariffs and higher-for-longer interest rates, resilience is exactly what investors have been hoping to see.

This week’s data offered some of that reassurance. Business activity across the US, eurozone, Japan and the UK accelerated for a second consecutive month in July, reaching the strongest pace since last November. Growth forecasts for ASEAN+3, the ten ASEAN economies together with China, Japan and South Korea, were revised higher. Singapore’s economy remains supported by technology demand, while deposits from residents outside Singapore have risen to a record high.

On paper, the global economy still has support. The more important question is what that support is made of, and increasingly the answer is becoming narrower. Artificial intelligence demand is carrying more of the regional growth story. Safe-haven flows are reinforcing Singapore’s financial position. Fiscal measures are helping households and businesses absorb higher costs. Central banks are holding the line, but they are not yet offering much relief.

There is a safety net beneath the global economy. It is not as wide as it looks.

A Recovery With Less Room for Error

The improvement in global activity is real, but it should not be mistaken for a clean recovery.

July’s flash Purchasing Managers’ Index (PMI) surveys, which gauge business activity by asking company managers whether conditions are improving or worsening, showed all four major developed economies expanding, with both manufacturing and services contributing to the rebound. The US led the services upturn, Japan stood out in manufacturing and Europe returned to modest growth after recent weakness. These are encouraging signals after the disruption caused by the Middle East conflict.

Yet part of the strength appears to have come from temporary supports. Hospitality and leisure demand benefited from the FIFA World Cup in the US, Canada and Mexico. Hotter weather helped certain areas of spending. Manufacturers also continued to build inventories as a precaution against supply disruptions and tariff risk. An economy propped up partly by a football tournament and a heatwave can look stronger than its underlying momentum actually is.

The global expansion has not disappeared, but neither has the inflation problem. Energy prices remain exposed to geopolitical risk. Tariff-related costs are still feeding into corporate planning. Supply chains remain vulnerable, particularly where critical goods or shipping routes are involved. For policymakers, this creates a difficult balance: growth has proved more resilient than feared, but inflation has not eased enough to let them relax. That is why the Federal Reserve’s latest pause did not feel especially dovish.

The Fed Keeps the Net Tight

The Fed kept rates unchanged in July, but the decision did not give markets the comfort that a pause sometimes provides.

Three members of the Federal Open Market Committee (FOMC), the Fed’s rate-setting body, dissented in favour of a 25-basis-point hike, underlining that the inflation debate inside the central bank remains unresolved. Chair Kevin Warsh also made clear that the Fed is prepared to tighten again if inflation persists, while deliberately avoiding firm forward guidance. The message was less about policy becoming easier and more about inflation needing to prove, over a sustained period, that it is genuinely cooling.

That distinction matters because a resilient economy does not automatically bring policy relief. If growth holds up while inflation risks remain alive, central banks have less reason to move quickly. If labour markets remain firm, energy prices stay vulnerable and tariffs feed through into costs, the bar for easing rises rather than falls. In previous cycles, softer growth or easing inflation alone might have been enough for markets to expect faster support. This cycle is different because central banks are still carrying the memory of inflation that stayed too high for too long, and they are waiting for evidence that better data can last, not simply for one good print.

Financial conditions remain restrictive as a result. Bond yields stay sensitive to each payrolls print, inflation release and wage number. Investors may still believe rate cuts will eventually arrive, but the burden of proof has shifted firmly onto the data, and the global economy’s resilience does not change the fact that the cost of capital still matters.

If policy is not yet ready to support the recovery, the more important question becomes what is currently carrying the weight instead.

AI Is Carrying More Weight

One of the clearest sources of support is the AI investment cycle.

ASEAN+3 has benefited from strong exports of semiconductors and AI-related products, with the ASEAN+3 Macroeconomic Research Office (AMRO), the region’s own macroeconomic surveillance body, raising its 2026 growth forecast for the region to 4.1 per cent. Electronics, advanced manufacturing and data infrastructure are no longer just sector themes. They have become an important part of the macro story.

This is also visible in Singapore. Manufacturing output slowed in June, rising 7.2 per cent year on year after May’s much stronger gain, but the broader economy remains firm. MAS expects Singapore’s economy to hold up through the rest of 2026, supported by electronics, memory chips, server infrastructure and related services, with technology-linked sectors expected to account for a large share of full-year growth.

That is a meaningful source of support. It is also a concentration risk. The stronger the AI cycle becomes, the more dependent parts of the region become on its continuation, and AMRO has already warned that even a moderate slowdown in global technology investment could pull ASEAN+3 growth materially lower in 2027. That warning deserves to be taken seriously, because markets often treat strong investment themes as though they can carry themselves indefinitely.

AI demand is powerful, but it is still demand. It depends on corporate capital expenditure, earnings confidence, energy capacity, supply chains and the belief that today’s investment will translate into tomorrow’s productivity gains. If those assumptions hold, AI can continue to support exports, manufacturing and market sentiment. If they weaken, growth that looks so solid today could become considerably less reliable. None of that makes the AI cycle fragile, but it should not be mistaken for a broad-based economic safety net.

Singapore’s Layers of Support

Singapore’s position is more interesting because it has several layers of support working at once.

The AI cycle is helping the real economy, with technology exports, electronics and related services continuing to provide momentum despite the slowdown in monthly manufacturing output. At the same time, Singapore’s financial system is attracting capital at a moment when geopolitical uncertainty remains elevated. Deposits from residents outside Singapore rose to a record S$667.7 billion in June, up 7.3 per cent year on year and around S$41.8 billion above February’s level. The persistence of those inflows points to Singapore’s safe-haven appeal at a time when investors and institutions are seeking stability, reflecting confidence in institutions, currency stability and policy credibility as much as any single financial calculation.

Singapore also has policy support behind it. The government’s new S$900 million package is designed to help firms and households manage higher costs linked to the Middle East conflict and supply-chain pressures. For SMEs, the measures provide near-term cash flow relief through a one-off grant and enhanced financing support. For households, additional CDC vouchers and U-Save rebates help soften the pass-through from higher imported prices.

These measures do not remove the source of the pressure. They make the pressure more manageable, which is a meaningful distinction for a small and open economy that cannot control energy prices, tariffs or global supply disruptions but can preserve confidence and maintain policy credibility while conditions remain unsettled.

The Risk Is Not Weakness but Dependence

The temptation is to describe the current backdrop as one of resilience versus risk. That is true, but it does not go far enough. The more precise issue is dependence.

The global economy is depending on AI investment to support manufacturing and exports. It is depending on policy support to cushion households and firms from higher costs. It is depending on safe-haven flows to reinforce confidence in markets such as Singapore. It is depending on central banks not being forced into another round of tightening. Any one of those supports can hold on its own. The concern is that too many of them are being asked to hold at the same time.

If AI investment slows, ASEAN+3 growth becomes more vulnerable. If energy prices rise again, inflation pressure returns. If tariffs weigh more heavily on supply chains, business margins come under strain. If US labour data remain too strong, the Fed may have less room to soften its stance. If safe-haven flows reverse, defensive support for certain markets could weaken.

None of this points to imminent stress, but it does suggest that investors should be careful about confusing resilience with broad strength. The global economy is not without support. AI demand is helping exports. Policy measures are helping households and firms. Safe-haven flows are reinforcing Singapore’s financial position. Business activity has recovered from the immediate shock of recent geopolitical disruptions.

Any support drawn from a narrow set of sources still needs to be watched closely. The second half of 2026 may therefore be less about whether the safety net exists, since it clearly does, and more about how much weight it can carry if the next shock arrives before the recovery becomes more broadly based.