Gross Domestic Product (GDP) expanded 1.8 percent in January-March on a quarter-on-quarter, seasonally adjusted and annualised rate, said the Ministry of Trade and Industry (MTI).
The figure is much better than the government's advanced estimate of a 1.4 percent contraction.
Year-on-year, the Singapore economy grew by 0.2 percent in Q1, much better than the government's flash estimate of a 0.6 percent contraction.
Stronger performance in the finance and insurance sector spurred Singapore's economy in the first quarter.
The sector recorded a 50.6 percent quarterly growth to about S$10.2 billion in Q1, partly supported by a rise in trading of equities and foreign exchange.
Monetary Authority of Singapore (MAS) deputy managing director, Ong Chong Tee, said: "We've seen some pickup in general investment banking, wealth management activities, so fees and commission for example have grown quite strongly in the first quarter.
"As a whole, as long as the global environment remains fairly 'risk-on' for example, we think financial sector activity should continue to hold up for the rest of the year. But...because it is sentiment-sensitive, that number can be fairly volatile in terms of financial sector activities."
The services sector, which accounted for 70 percent of Singapore's economy, grew 7.9 percent on-quarter. This helped to mitigate the 12.3 percent contraction in manufacturing.
Meanwhile, MTI says the outlook for the electronics sector is positive as global recovery continues.
The construction sector grew by 16.5 percent on-quarter, reversing a 3.9 percent contraction in the previous quarter, boosted by a strong rebound in private sector building activities.
Looking ahead, MTI said Singapore's economic growth should "improve gradually" for the rest of the year in tandem with an expected rise in global demand for exports, supported by domestic drivers such as the construction and services sectors.
It kept its growth forecast at 1.0-3.0 percent this year, barring downside risks.
"Fiscal uncertainties in the US remain with the failure of Congress to raise the debt ceiling, while the eurozone is prone to a potential flare-up of the sovereign debt crisis," MTI said in its statement.
"Other uncertainties include the risk of an escalation in regional geopolitical tensions and a possible outbreak of respiratory viruses."
Despite the surprise expansion in Q1, some economists said there are still some concerns.
Selena Ling, head of Treasury Research & Strategy at OCBC, said: "What really didn't change is that we still have a tight labour market, unemployment rate still remains low, labour productivity still remain in contraction territory.
"So, no sign of celebration yet as far as the productivity push is concerned. And, I think, so far the wage cost element is fairly muted.
"But going forward, I think the foreign manpower curbs are really going to hurt."
In April, headline inflation rose by 1.5% year-on-year, the lowest in nearly three years.
This was due largely to falling car prices.
The cost of transportation, which has an index weighting of 16%, gained 0.5% in April from a year earlier due to a fall in the average price of the Certificate of Entitlement (COE).
The average price of COEs has fallen about 25% from its peak, according to MAS' Mr Ong.
Meanwhile, the MAS said core inflation - which excludes housing and private transportation costs - could pick up as a result of economic restructuring efforts and potential increase in wages.
The central bank expects core inflation to come in at the higher end of 2 percent towards the end of the year.
For the full year, MAS expects headline inflation to hover at 3 to 4 percent and between 1.5 and 2.5 percent for core inflation.-Channel News Asia
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