World economy: Are we on track?
The BIS annual economic report was published last Monday. For those who don't know, BIS, or the Bank for International Settlements, is an international body based in Switzerland that alongside their banking activities serves as a forum and research group for central banks. Their economic report serves as a pretty heavy snapshot of the status of the world economy – and is worth a read if you are interested in some well-informed prognostications about the way in which things are moving. A heavy snapshot that I would like to cover across two blogs, focusing on two major topics covered by the report: The monetary policy aspect and a second that explores new technologies.
Reading through the report, the graphs below struck me as a particularly succinct way of showing just what an extraordinary period the past 10 years have been. We've witnessed rapid accumulation of government debt; interest rates have across the board been in unprecedentedly low territory; Quantitative Easing programmes have hugely inflated bank balances; and serious structural reforms have been called for and delivered. All of this to recover from a crisis that occurred a decade ago.
Now that the situation appears to be improving, it seems the next period calls for a gradual lessening of these extraordinary measures, returning monetary policy measures back towards more conventional tools. We've already seen some of the first signs of this: from 2015 the Fed has been gradually raising its funds rate, and the ECB announcing a few weeks ago that it was winding down its asset purchases over the course of this year. All of this is by necessity a delicate and gradual process that has a risk of spooking the markets if conducted without finesse.
But monetary policy can and should only carry us so far, which is no more so apparent when considering the tricky balance we currently face between an increasingly globalized economy in which emerging markets play a more important role than previously, versus, in some places, moves towards more protectionist trade policies. 2008 was in this sense an inflection point, where, for the first time in modern statistical records, the combined value of emerging countries outweighed that of developed countries in terms of share of global GDP.
With this being the case, maintaining a multilateral and globalized approach to capital markets is even more crucial than previously – a topic Deutsche B?rse has gone into some depths on in its work on the European Capital Markets Union project. Infrastructures such as ICSDs in particular are pivotal elements in this delicate system fulfilling their original purpose of connecting capital markets around the globe. Thus we must deem it our responsibility to build and secure the stage for future global interaction among players in the financial industry.