BIS Warns of Global Economic Crossroads Amid Rising Uncertainty

Why in the News?

1. The Bank for International Settlements (BIS) released its yearly report on the world economy.
2. The BIS chief said the global economy is at a turning point, facing big risks and uncertainties.

Key Highlights:

1. The World Economy at a 'Pivotal Moment'

Agustín Carstens, the outgoing head of BIS, described the global economy as entering a "new era of heightened uncertainty and unpredictability."

Implications:

1. 1. Institutions like central banks are under pressure as public trust is eroding.
   2. Traditional economic frameworks (e.g., open trade, stable alliances) are being disrupted.
2. Rise of Protectionism and Trade Fragmentation

1. Cause: US-driven trade wars, rising tariffs, and retaliatory measures.
2. Effect:
   1. Decline in productivity and long-term economic growth.
   2. Increased risk of supply chain disruptions and reduced global cooperation.
3. Example: Upcoming July trade tariff deadline under Trump highlights growing instability.

3. Central Bank Independence Under Scrutiny

1. BIS View: Friction between governments and central banks is expected, even "by design".
2. Concern: Politicization of central banking could hinder effective and independent monetary policy.

4. Public Debt and Fiscal Limits

1. Observation: Rising public debt is reducing fiscal space, especially with interest rate increases.
2. Key Warning: Governments will find it harder to "spend their way out of crises".
3. Compounding Factor: Increasing military budgets globally add further fiscal strain.

5. Exchange Rate Volatility and Dollar Slide

1. Current Situation: US dollar is down by approximately 10% in H1(First half of financial year), the largest drop since the 1970s free-float era.
2. BIS Insight:
   1. No clear evidence of a "great rotation" away from US assets.
   2. Hedging by non-US investors likely contributes to short-term dollar weakness.
   3. Not yet a cause for panic, but worth monitoring closely.

Great rotation: The "Great Rotation" is a term used in financial markets to describe a large-scale shift of investment flows from one major asset class to another, typically from Bonds to Equities or From U.S. Assets to Non-U.S. Assets.

 

6. Technological and Financial Innovations – Stablecoins

1. Earlier BIS Warning: Raised concerns about the unchecked rise of stablecoins.
2. Implications:
   1. Potential threats to financial stability.
   2. Calls for regulation and oversight of digital currencies and fintech innovations.

Stablecoins: Stablecoins are a type of cryptocurrency designed to maintain a stable value, usually by being pegged to a real-world asset like a currency (e.g., US dollar) or commodity (e.g., gold).

 

7. BIS Financial Health

1. Performance:
   1. Net profit of $1.2 billion (in SDR terms).
   2. Record-high comprehensive income and currency deposits.
2. Statement: Emphasis on maintaining high creditworthiness to support global central banks.

Challenges and Way Forward:

Challenges	Way Forward
Rising geopolitical tensions and trade wars disrupting global order	Promote international cooperation and rebuild trust in multilateralism
Declining economic productivity and growth	Invest in innovation, infrastructure, and education to boost output
High and rising public debt levels	Improve fiscal discipline and prioritize essential spending
Weakening resilience to economic shocks (e.g., due to ageing, climate)	Build shock-resilient systems and promote climate-adaptive policies
Erosion of central bank independence	Ensure clear separation between politics and monetary policy
Falling public trust in institutions including central banks	Increase transparency, communication, and accountability
Sharp decline in the US dollar raising concerns	Monitor currency trends and manage risk through coordination
Unchecked growth of stablecoins and digital assets	Introduce strong regulation and oversight for digital financial tools

Conclusion:
The BIS report highlights that the global economy faces deep uncertainty due to geopolitical tensions, economic fragmentation, and rising debt. To restore stability and growth, it stresses the need for global cooperation, central bank independence, and prudent fiscal and monetary policies.

EnsureIAS Mains Question: The global economy is at a pivotal moment marked by rising uncertainty, debt vulnerability, and weakening multilateralism. In this context, critically examine the role of central banks and international financial institutions in ensuring global financial stability. (250 words)

 

EnsureIAS Prelims Question: Q. With reference to the Bank for International Settlements (BIS), consider the following statements: It acts as a bank for central banks and facilitates international financial cooperation. It is headquartered in Basel, Switzerland. It is an agency of the United Nations. Which of the statements given above is/are correct? 1 and 2 only 2 and 3 only 1 and 3 only 1, 2 and 3 Answer: a Explanation: Statement 1 is correct: BIS acts as a bank for central banks and promotes global monetary and financial stability. Statement 2 is correct: It is headquartered in Basel, Switzerland. Statement 3 is incorrect: BIS is not a UN agency; it is an independent international financial organization.