World Economy

BIS Warns of Pockets of Risks to Global Growth

Claudio Borio cautioned against higher inflation and debt, rising protectionism and timidity on investment
BIS Warns of Pockets of Risks to Global GrowthBIS Warns of Pockets of Risks to Global Growth

The Bank of International Settlements urged governments to allow growth trends toward long-term averages to target structural reform while warning against inflation and protectionist winds.

In its annual report, the BIS said the growth outlook appeared more favorable than the anemic climate of a year ago, Claudio Borio, head of its monetary and economic department, told reporters in a conference call on Sunday, AFP reported.

“We had already stressed last year that the rhetoric being used to describe the global economy was too downbeat,” said Borio, noting a strengthening of the global growth outlook, lower jobless tallies in major economies and inflation coming closer to target.

“One good year has been sufficient for economic conditions to become the most favorable since the great financial crisis,” said Borio in a report which noted that “raising the economy’s growth potential is critical”. For Borio, “the problems we face are global. The solutions must be global too. It would be illusory to think and act otherwise”.

Borio further cautioned against higher inflation and debt, rising protectionism and timidity on investment. 

Economic Globalization 

For the BIS, “economic globalization has contributed to a substantial rise in living standards and falling poverty over the past half-century” amid enhanced competition and new technologies driving efficiency gains.

But “like any other form of far-reaching economic change, globalization poses challenges,” notably rising income inequality, while “financial openness exposes economies to destabilizing external influences,” the report said. “Properly designed domestic policies can enhance the gains from globalization and mitigate the adjustment costs. And international cooperation must supplement such policies in order to address global linkages.”

Overall, the BIS said it supported “rebalancing policy towards structural reforms, relieving an overburdened monetary policy, and implementing holistic policy frameworks that tackle more systematically the financial cycle”.

The ‘Great Unwinding’

Major central banks should press ahead with interest rate increases, the BIS said, while recognizing that some turbulence in financial markets will have to be negotiated along the way.

The BIS, an umbrella body for leading central banks, said that global growth could soon be back at long-term average levels after a sharp improvement in sentiment over the past year.

Though pockets of risk remain because of high debt levels, low productivity growth and dwindling policy firepower, the BIS said policymakers should take advantage of the improving economic outlook and its surprisingly negligible effect on inflation to accelerate the “great unwinding” of quantitative easing programs and record low interest rates.

New technologies and working practices are likely to be playing a role in suppressing inflation, it said, though normal impulses should kick in if unemployment continues to drop.

“Since we are now emerging from a very long period of very accommodative monetary policy, whatever we do, we will have to do it in a very careful way,” BIS head of research, Hyun Song Shin, told Reuters.

“If we leave it too late, it is going to be much more difficult to accomplish that unwinding. Even if there are some short-term bumps in the road it would be much more advisable to stay the course and begin that process of normalization.”

Four Main Risks

The BIS identified four main risks to the global outlook in the medium-term. A sudden flare-up of inflation which forces up interest rates and hurts growth, financial stress linked to the contraction phase of financial cycles, a rise in protectionism and weaker consumption not offset by stronger investment.

The first seems unlikely for now at least, with Shin saying that the BIS, like many, had been surprised that inflation and wage growth has remained so subdued as growth in major economies has picked up.

The question for central bankers, therefore, is whether new technologies and working practices had fundamentally changed the inputs in their economic models and whether it is right to keep such a heavy focus on keeping inflation at certain levels—near 2% for likes of the European Central Bank and US Federal Reserve.

“Inflation is certainly not the only variable that matters ... and we should keep one eye at least on financial developments,” Shin said.

A broadening away from inflation-targeting to financial market conditions would require a mindset change in large parts of the world and could speed up interest rate cycles.

When the US Federal Reserve last embarked on rate increases more than a decade ago, it took two years to raise them from 1% to above 5%, with hikes at 17 consecutive meetings. In the current cycle, it has taken 18 months for a 1 percentage point increase.


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