Singapore GIC: Risk Of Economic Stagnation, Then Inflation

The world faces the risk of economic stagnation as it pulls out of steep economic downturn, but this could be followed by inflation if policymakers aren't careful, Singapore's sovereign wealth fund said Saturday.

"We appear to have avoided a global depression and are now in a global recovery," which will extend into next year, Tony Tan, deputy chairman of Government of Singapore Investment Corp., told a panel during the annual summit of the Asia-Pacific Economic Cooperation forum in Singapore.

"I expect higher stagnation risk in the medium term to be followed by higher inflation risk after that," Tan said.

"Over the next one to three years, weak growth and excess capacity will be strongly disinflationary," he said. "However, beyond that, over the next five to 10 years, policy errors or political pressure could lead central banks to accommodate higher inflation."

Countries that have racked up little debt, especially in Asia and parts of Latin America, will recover strongly and "in the short term, the bounce could surprise on the upside," Tan said. But activity in "over-leveraged developed economies," especially consumption in the U.S. and U.K., will likely not be as robust as in previous recoveries, he said.

More broadly, "Over the next decade, it looks like economic, political and market risks are going to be higher than the last 20 years before the crisis," Tan said.

"Over time the rise of (emerging markets)--especially China, India and Russia--could, together with competition for limited natural resources, lead to higher geopolitical risks," he said.

GIC is the world's fourth-largest sovereign wealth fund in terms of money managed, according to Deutsche Bank

-By P.R. Venkat, Dow Jones Newswires; [phone]; [e-mail]