In his traditional New Year message, he noted that Singapore benefited from the global economic upswing. But more fundamentally, the better-than-expected growth was because Singapore's productivity - long a challenge for the country - has grown.
"Singaporeans are upgrading and learning new skills, while businesses are innovating and adopting new technology. That is how we will stay competitive and ready for the future."
Singapore is finishing the year stronger than it started, and "we are ushering in 2018 with confidence and strength", he added.
In the past five years, productivity growth has languished at between minus 0.2 per cent and 1 per cent despite efforts to help firms and workers upgrade. In 2017, it shot up to between 3 per cent and 3.5 per cent, due to an improving global economy and a tightening of the inflow of foreign workers, said analysts.
Looking ahead to 2018 and beyond, he announced plans to mark the 200th anniversary of 1819, when Stamford Raffles set foot on the island. Singapore marked 50 years of independence in 2015 but "the Singapore Story began way before 1965", he said. "We must understand truly how far back our history reaches, and how complex it is."
The history goes back at least 700 years. Singapore was a maritime emporium in the 14th century, though it declined in later centuries.
"We should commemorate this bicentennial appropriately, just as we marked the 150th anniversary in 1969. It is an important milestone for Singapore; an occasion for us to reflect on how our nation came into being, how we have come this far since, and how we can go forward together," he said.
With observers expecting firmer clues this year on who Singapore's fourth prime minister would be - especially with an imminent Cabinet reshuffle - PM Lee said younger ministers will play a bigger role in policymaking. Parliament will be prorogued after the Budget before a new session opens in May. The opening will see the President's Address laying out the Government's agenda for the rest of the term.
He said "this will bear the imprint of the fourth-generation leadership, who are taking on greater responsibilities, and putting forth their ideas for Singapore".
The home front will also see an upgrade of industries and workers' skills, improvements to healthcare, work to raise rail reliability and big infrastructure projects such as the Tuas Megaport, the High Speed Rail link to Malaysia and Changi Airport's Terminal 5.
These domestic priorities are essential investments for the future, which "will stretch way beyond this term of government", he said. "We have to plan well ahead for them."
Looking back on 2017, he said the year began with uncertainty at home and abroad. The economic mood was muted and there were worries about security and terrorism. "But Singaporeans pressed on, undaunted," he said. "We dealt with the urgent concerns, but we looked beyond immediate problems and did not settle for quick fixes."
He noted milestones such as the SGSecure campaign, which raised awareness of the terrorist threat, and changes to enable a reserved presidential election, which he described as "one significant step to strengthen our racial harmony".
Singapore also reaffirmed its strong ties with major powers China and the US, and deepened cooperation with immediate neighbours Malaysia and Indonesia.
The external environment remains uncertain, with tensions over North Korea and elections due in Malaysia and Indonesia.
And as Asean chair this year, Singapore "hopes to take the group forward with... chairmanship themes of 'resilience' and 'innovation'".