Building resilient growth requires international cooperation

The current economic upswing provides an opportunity to build greater economic resilience, the Bank for International Settlements (BIS) writes in its 87th Annual Report, released on Sunday. This involves shoring up the global economy's ability to withstand shocks and adapt to new trends, and preventing the emergence of imbalances.

At a global level, this means reinforcing the multilateral approach to policy, which has supported economic growth over the last six decades. At a domestic level, there is a need to restore policy space, implement reforms that boost long-term growth, and adopt measures to mitigate the adjustment costs to fundamental changes such as those coming from globalisation and technological change.

Trade and financial integration has greatly lifted global living standards. At the same time, its gains have not always been evenly distributed. Adjustment costs and financial risks need to be carefully managed, but the answer is not to roll back integration, the BIS argues in a special chapter (Chapter VI). 

"Just like technology, globalisation is an invaluable common resource that offers tremendous opportunities. The challenge is to make sure that it is perceived as such rather than as an obstacle, and that those opportunities are turned into reality," the report says (Chapter I).  

In its flagship economic report, the BIS examines risks to sustained growth from a potential flare-up in inflation, financial stresses, debt and protectionism (Chapter III) and analyses the balancing act central banks face in normalising policy (Chapter IV). 

High household debt could act as a drag on growth, especially when higher interest rates increase its cost. Simulation exercises suggest that higher rates could push debt service ratios into uncomfortable territory in some countries (Box III.A). This highlights the importance of gradual and steady monetary policy normalisation, but also the risk of waiting too long to normalise.

The report analyses long-term changes in labour markets and whether they have dampened price pressures. It concludes that global as well as domestic labour market conditions deserve close monitoring, as purely domestic indicators no longer appear to have the same predictive power (Chapter IV). 

BIS authors also examine the disconnect between low financial market volatility and heightened policy uncertainty (Chapter II) and the remaining challenges in banking sector adjustment (Chapter V).

Other new research shows how the interaction between banks' internal capital allocation and regulatory standards can affect market functioning (Box V.A). Analysis also suggests that global US dollar funding markets will probably be a key pressure point during any future market stress episodes (Chapter V).

The BIS's financial results, which were also published in the Annual Report, included a balance sheet total of SDR 242.2 billion (USD 329.0 billion) at end-March 2017 and a net profit of SDR 827.6 million (USD 1.124 billion).