Trade tensions and fractious geopolitics risk exposing deep fault lines in the global financial system, central bank umbrella body the Bank for International Settlements (BIS) said in its latest assessment of the state of the world economy.
The outgoing head of the BIS, often called the central bankers' central bank, Agustín Carstens, said the US-driven trade war and other policy shifts were fraying the long-established economic order.
He said the global economy was at a “pivotal moment” and entering a “new era of heightened uncertainty and unpredictability” which was testing public trust in institutions, including central banks.
The bank's report was published before US President Donald Trump's trade tariff deadline of July 9 and comes after six months of intense geopolitical upheaval.
When asked about Trump's criticisms of US Federal Reserve chair Jerome Powell, which have included Trump labelling the Fed chair “stupid”, Carstens was not overly critical.
“It is to be expected at certain points in time that there will be friction,” the former Mexican central bank governor told reporters, referring to the relationship between governments and central banks.
“It is almost by design”.
The BIS' annual report, published on Sunday, is viewed as an important gauge of central bankers' thinking, given the Switzerland-based forum's regular meetings of top policymakers.
Rising protectionism and trade fragmentation were “particular concerning” as they were exacerbating the decades-long decline in economic and productivity growth, Carstens said.
There is also evidence the world economy is becoming less resilient to shocks, with population ageing, climate change, geopolitics and supply chain issues contributing to a more volatile environment.
The post-Covid-19 spike in inflation also seems to have had a lasting impact on the public's perception about price moves, a study in the report showed.
High and rising public debt levels are increasing the financial system’s vulnerability to interest rates and reducing governments' ability to spend their way out of crises.
“This trend cannot continue,” Carstens said, referring to the rising debt levels, and he said higher military spending could further push up the debt up.
Hyun Song Shin, the BIS's main economic adviser, also flagged the sharp fall in the dollar. It is down 10% since the start of the year and on track to be its biggest H1 drop since the free-floating exchange rate era began in the early 1970s.
He said there was no evidence this was the start of a “great rotation” away from US assets as some economists have suggested, but acknowledged it was too early to know as sovereign funds and central banks move slowly.
Shorter-term analysis, though, showed “hedging” by non-US investors holding Treasuries and other US assets appears to have made an “important contribution” to the dollar's slide over the past few months.
“We haven't seen anything (yet) that would give us any cause for alarm,” Shin added.
The BIS published one part of its report last week that gave a stark warning about the rapid rise of stablecoins.
In terms of the BIS' own finances, it said it made a net profit of 843.7m IMF SDR (R21.3bn), while its total comprehensive income reached a record high of SDR 3.4bn (R94.2bn) and currency deposits at the bank also reached a new high.
Carstens said: “It is important the BIS has the highest creditworthiness out there.”
Reuters
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