Global measures to tackle inflation may cause recession, but must be taken: PM Lee

The Singapore Prime Minsters also said that central banks have been forced to tighten their monetary policy as inflation has risen, which may negatively affect economic growth and the global financial market.

Timothy Goh

Timothy Goh

The Straits Times


May 23, 2022

SINGAPORE – The global economy is currently facing high inflation, and there is a risk that measures taken to combat this problem may lead to a recession – but action must be taken nonetheless, lest inflation become a very serious problem for the world, said Prime Minister Lee Hsien Loong.

PM Lee was speaking to Japanese media group Nikkei on Friday (May 20), ahead of its International Conference on the Future of Asia, which he will attend in Tokyo this week.

During the interview published by Nikkei on Monday (May 23), Nikkei’s editor-in-chief Tetsuya Iguchi pointed out that global economic growth has been sustained by the expansion of debt and loose monetary policy for the past 15 years.

He said that central banks have been forced to tighten their monetary policy as inflation has risen, which, in turn, may negatively affect economic growth and the global financial market.

In response, PM Lee noted that the global economy had recovered from the Covid-19 pandemic faster than anybody had expected, in part due to stimulus measures.

“However, the stimulus measures continued to be applied very generously, for political reasons, even as the economy was already visibly recovering in the United States, and also in Europe,” he said, adding that this contributed to a spike in inflation even before the crisis in Ukraine.

“Now the war has made it worse because it has disrupted energy supplies, with Russian energy now being blocked from world markets. It has disrupted food supplies, grain certainly. That has added a supply-side inflationary shock as well,” said PM Lee.

He noted that about a year ago, central banks had been rather relaxed about the prospects of keeping inflation under control, and had in fact been worried about deflation.

“I think they were too complacent even then. But now it is quite clear that they have to change their stance and I believe that they are doing so,” said PM Lee.

But given that inflation is now high, drastic measures are needed to bring it back down and prevent inflationary expectations from taking root, he added.

“It is very difficult to do that and have a soft landing. There is a considerable risk of doing what you need to do but as a result, provoking a recession,” said PM Lee, adding that this had happened repeatedly in the 1960s, 70s, 80s and 90s.

He said: “That is a risk which we have to anticipate and watch out for. You will have to take that risk because if you do not act against inflation, that will become a very serious problem for the world.”

PM Lee also acknowledged that major economic powers are currently not cooperating, which poses a problem not just for the global economy but for other issues such as climate change and nuclear proliferation as well.

“Because without international cooperation, you cannot deal with these common problems facing humanity,” he said.

Asked about the debt situation in Asian economies, particularly emerging ones, PM Lee said: “Generally speaking, their debt is not as severe a problem as it was before the Asian financial crisis in 1997 and 1998.

“A lot of the debt is denominated in domestic currency, unlike the last time, when it was denominated in US dollars.

“But the food and fuel prices will cause them inflation as well as hardship. That is a problem,” he added.

“Some countries are in a crisis, for example, Sri Lanka. But there are specific problems there. Overall, I think that the emerging markets will see economic hardship in their societies, but the judgment is that we probably will not have an emerging markets financial crisis.”

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