In his annual policy speech on Sunday, Lee warned it was possible the world would sink into another recession because of the debt crisis in Europe and the United States’ economic woes that led to a landmark downgrade by Standard & Poor’s of the country's top-notch credit ratings.
“Europe is troubled, America is also troubled,” he said in his National Day rally speech, adding this has led to the recent volatility in the global financial markets.
Lee said the markets’ volatility was “only a reflection of the real issue” which is lack of investor confidence that the US and European governments can “make the hard decisions and to resolve the problems which are deep and very serious.”
The US government is spending too much and its fiscal deficit is “unsustainable”, said Lee, adding that deep divisions between the Republicans and the Democrats have made it harder for the country to solve its problems.
Against this backdrop, China, India and other emerging markets are doing “quite well” for the moment, he said.
“But if America and Europe will go into another recession, then I think China, India and the emerging economies will also be affected, will also be vulnerable,” he warned.
“And therefore Singapore has to be watchful. We don’t have to press the panic button yet but we have to be watchful because there’s quite a possibility that the world will go into another recession,” he added.
“That's going to affect us. It can easily happen.”
Singapore’s economic output contracted by 6.5 per cent in the second quarter as global electronics demand slumped, according to official data.
Export-dependent Singapore was the first Asian economy to suffer negative growth during the last global downturn in 2008 but also led the recovery with a strong growth rebound in 2010.
Markets around the world have been roiled on concerns that the US and eurozone debt crisis may spark a new recession.
The crisis started in Greece and is now fuelled by fears that Spain or Italy might default on their debt and possibly spark a break-up of the currency shared by 17 countries.