In its latest annual economic report, the Bank for International Settlements highlights numerous risks facing the global economy and financial system.

«So far, so good...» reads the headline introducing the Bank for International Settlements' (BIS) 2024 Annual Economic Report, released on Sunday. Based in Basel, known as the «central bank for central banks,» the BIS not only depicts recent months relatively spared from severe crises in economies and financial markets but also reaffirms its traditional role as a sharp observer and wise cautioner.

Despite a combination of higher interest rates, high levels of debt, and inflated valuations in the private sector, the BIS notes surprisingly little has unfolded thus far, anticipating an increase in loan defaults. Significant risks persist for the banking system, particularly concerning commercial real estate markets and private credit markets.

Illusion of a Debt-Fuelled Growth Model

The BIS critically assesses the development of public debt and weak productivity growth as particularly critical for the overall economy. Public finances represent «one of the biggest threats to macroeconomic and financial stability in the medium to longer term.»

«Only structural policies can deliver the productivity improvements needed to enable higher sustainable growth. Recognising this point, in turn, calls for a broad change of mindset to dispel the deeply rooted ‹growth illusion› at the heart of the debt-fuelled growth model that the world has de facto relied on for too long,» assert the authors of the report to economic and fiscal policymakers.

Caution Against Loose Monetary Policy

While central banks have managed to tame inflationary pressures, the BIS expresses unease with current monetary policies. Lowering policy rates solely on the assumption that the natural interest rate (equilibrium rate) remains at the historically low level observed before inflation would be imprudent. In examining the longer-term lessons from the recent inflation surge, the BIS emphasizes (not for the first time) the limits of an exceptionally prolonged and strong phase of monetary easing.

The BIS report also delves into the impacts of artificial intelligence on monetary policy. AI has the potential to transform the economy and serve central banks as a technology, particularly for forecasting purposes.