A new policy compass is needed to help the global economy step out of the shadow of the Great Financial Crisis, writes the Bank for International Settlements (BIS) in its 84th Annual Report, released today. In its main economic review for the year, the BIS calls for adjustments to the current policy mix and to policy frameworks with the aim of restoring sustainable and balanced economic growth.
The BIS points out that the global economy has shown encouraging signs over the past year but it has not shaken off its post-crisis malaise. Despite an aggressive and broad-based search for yield, with volatility and credit spreads sinking towards historical lows, and unusually accommodative monetary conditions, investment remains weak. Debt, both private and public, continues to rise while productivity growth has further extended its long-term downward trend. There is even talk of secular stagnation.
To return to sustainable and balanced growth, policies need to go beyond their traditional focus on the business cycle and take a longer-term perspective – one in which the financial cycle takes centre stage. They need to address head-on the structural deficiencies and resource misallocations masked by strong financial booms and revealed only in the subsequent busts. The only source of lasting prosperity is a stronger supply side. It is essential to move away from debt as the main engine of growth, says the BIS.
“The upturn in the global economy is a precious window of opportunity that should not be wasted,” the report says.
The BIS notes, “In crisis-hit countries, there is a need to put more emphasis on balance sheet repair and structural reforms and relatively less on monetary and fiscal stimulus – In economies that escaped the worst effects of the financial crisis and have been growing on the back of strong financial booms, there is a need to put more emphasis on curbing those booms and building strength to cope with a possible bust. Warranting special attention are new sources of financial risks, linked to the rapid growth of capital markets. In these economies also, structural reforms are too important to be put on the back burner.”
“In no small measure,” the report says, “the causes of the post-crisis malaise are those of the crisis itself – they lie in a collective failure to get to grips with the financial cycle.” Addressing this failure calls for adjustments to policy frameworks – fiscal, monetary and prudential – to ensure that policies lean more deliberately and persistently against financial booms and ease less aggressively and persistently during busts. A key aspect here is to recognise the powerful impact that monetary policy can have on risk-taking, both within and across national borders. Policies that are not sufficiently symmetrical over successive business and financial cycles can generate an easing bias that, over time, paradoxically entrenches instability and weakness in the global economy and leaves policy without ammunition