Global economy on the brink – but of what?

The BIS headquarters in Basel Keystone

The Bank for International Settlements in Basel says there is considerable uncertainty over whether the global economy is at the beginning of a long boom or is exposed to the possibility of a downturn.

In its annual report, the Bank – commonly referred to as the central bank of the central banks – says there is also an unusual degree of uncertainty about how financial markets, which have been evolving rapidly, might react to possibly adverse macroeconomic shocks.

“There seems to be a widespread perception that the global economy now stands on the brink, but the brink of what remains the question,” says the report.

However, the BIS says what is more certain is that the current growth rate of the United States economy is unsustainable and it welcomes the recent tightening of monetary policy in the country.

In Europe, while some progress has been made, further reforms in labour and product markets are called for. These, adds the Bank, might also help to strengthen the external value of the euro.

In its remarks on Switzerland, the BIS says that the weakening of economic activity last year was mostly due to slower growth of domestic demand despite relatively favourable monetary conditions and a “remarkable” fall in unemployment.

It notes that the Swiss National Bank adopted a new policy strategy during the year centred on its inflation forecasts. Under the new framework, forecasts of inflation for the subsequent three years are published at each year-end and policy is adjusted accordingly.

by Robert Brookes