BIS: Global threats from debt, AI, and financial fragilities
Global pressures stemming from escalating public debt, financial fragilities, and the sustainability of the AI boom are amplifying risks, highlighting the necessity for disciplined policymaking, as noted by the Bank for International Settlements. The central bank umbrella group’s Annual Economic Report published on Sunday highlighted a complex array of vulnerabilities, encompassing strained fiscal positions, persistent supply shocks, and the potential for a resurgence of stubbornly high inflation. Despite the resilience of economic activity in recent months, decisive action from policymakers is essential, according to the BIS, to maintain stability. “Policy actions must reinforce each other to avoid a pull and push on the global economy. Ultimately, success hinges on robust fiscal and financial underpinnings,” stated BIS General Manager Pablo Hernandez de Cos.
The report underscored four critical pressure points. Inflation has resumed its upward trajectory, with the BIS warning that an increase in the frequency of supply disruptions may lead to entrenched inflation expectations among households and businesses. “The readiness to act if the central banks observe that there is the anchoring of inflation expectations is the main message that we want to set,” de Cos told. He stated that the recent ceasefire between the United States and Iran in the Middle East and the reopening of the Strait of Hormuz constituted “good news” that suggested extreme scenarios would be averted, although it was probable that the oil market would take time to “normalise”. The BIS also highlighted uncertainty regarding the sustainability of the ongoing increase in investment associated with artificial intelligence. While AI has enhanced confidence and bolstered growth through anticipated productivity gains, the bank cautioned that it was heightening concerns regarding employment. Additionally, supply bottlenecks and fierce competition could result in the overinvestment characteristic of earlier boom-and-bust cycles.
For central banks, it raised essential enquiries regarding the prospective functioning of the economy; however, de Cos remarked that at this juncture, it would be “unwise” to prescribe specific responses to these challenges. Financial vulnerabilities continue to be a significant area of concern. Heightened asset valuations and indications of investor complacency have rendered core bond markets more vulnerable, while the financing of the AI boom appears to be increasingly dependent on debt and intricate funding structures throughout the supply chain. Simultaneously, unprecedented levels of public debt and sovereign debt markets increasingly influenced by large, highly leveraged hedge funds have established “a new sovereign-financial stability nexus,” which introduces escalating risks.
“The new fiscal-financial stability nexus may mean more frequent and sharper drops in sovereign bond values,” noted Frank Smets, acting head of the BIS monetary and economic department, emphasising that such fluctuations could swiftly tighten financial conditions. De Cos indicated that the BIS conveyed a message of “urgency” regarding the necessity to reduce debt levels in significant economies, “because the fact is that today debt is high, and this is financed through non-bank financial intermediaries.” The BIS emphasised the necessity for policymakers to focus on maintaining price stability, ensuring fiscal sustainability, enhancing oversight beyond the banking sector, and implementing structural reforms. “Policymakers must act now. Delay will only make the necessary adjustments more costly,” de Cos stated.
