BIS: maintain the current upswing beyond the short term
In the current issue of its Annual Economic Report, the Bank for International Settlements (BIS) calls on policymakers to maintain the current economic upswing beyond the short term. Now is the opportunity to pursue necessary reforms and recalibrate policies, the report urges.
"We must seize the day," stressed BIS General Manager Agustín Carstens at the unveiling of the new Annual Economic Report of the BIS, also known as the central bank for central banks.
2017 was a very successful year for the global economy, the BIS Annual Economic Report notes. Economic growth was strong and inflation low, which BIS experts say is unusual so late in the expansion. According to the BIS, global growth rates were roughly on par with long-term averages recorded prior to the global financial crisis, and the expansion was highly synchronised across countries. The report goes on to state that unemployment continued to decline, reaching multi-decade lows in a number of economies, including some of the largest. Overall, headline inflation rates moved closer to central bank objectives, according to the report. The BIS sees the growth trend continuing for the next couple of years. This would mark one of the longest post-war expansions, the authors write.
The BIS believes that these gains are in no small measure the fruit of a decade of extraordinary monetary policies. In this context, the economists criticise the lack of support from other policy areas to aid in the global economy’s recovery. While central bank actions helped lay the groundwork for the visible resumption of growth, they have been one factor behind the legacy of swollen private and public sector balance sheets and higher debts, the experts note.
"As the global economy reaches or even exceeds potential, it is time to take advantage of the favourable conditions to put in place a more balanced policy mix to promote a sustainable expansion," they contend.
Threat of protectionism
In the report, the BIS identifies several risks it believes could threaten the expansion in the medium term. These are material, it argues, even though the situation differs from country to country. According to the economists, an escalation of protectionist measures or a sudden jump in historically low bond yields in core sovereign markets could trigger a fresh downturn. Political upheavals or disappointing profits could dent investors’ appetite for risk, shaking overstretched financial markets, say the experts.
Measures have to be taken now, they advise, to counter these risks. Although the specific policy mix will vary across jurisdictions, rebuilding room for policy manoeuvre requires taking a longer-term view, writes the BIS. The authors point to consolidating public finances as a priority. They also call on central banks to continue normalising monetary policy with a steady hand while being mindful of risks. Macroprudential instruments – instruments used to monitor the stability of the financial system as a whole – should be deployed against emergent risks in a targeted way. Making labour and product markets more flexible and implementing post-crisis financial regulatory reforms are also key to securing long-term growth, according to the BIS.
Banks not yet fully healed
The Annual Economic Report also assesses the state of the financial industry. The BIS economists argue that most banks have strengthened their balance sheets and adjusted to the newly finalised Basel III requirements.
"Yet improvements are not uniform and some countries’ banks are not fully healed, calling for further action," the BIS warns. The report also highlights the greater share of credit now being channelled through non-banks, such as asset managers, noting that this can make market reactions harder to anticipate.
The Annual Economic Report is the BIS’s flagship analysis of economic developments. It publishes the report in conjunction with its Annual Report. These two publications have been released together for the first time, replacing the traditional BIS Annual Report.