The Port of Paramaribo in Paramaribo, Suriname, on May 16. Suriname, a tiny nation ravaged by recession, inflation and impossible debts, saw its relief held up by superpower politics.ADRIANA LOUREIRO FERNANDEZ/The New York Times News Service
Agustín Carstens is general manager at the Bank for International Settlements.
The global economy is at a critical juncture that could weigh on prosperity for years to come. For the first time in decades, we face a combination of high inflation and financial fault lines. To stop these problems from becoming entrenched, it’s time for a reality check on what current policy settings can and cannot achieve.
Global inflation has crept down from its peaks as supply chains normalized, commodity prices fell and central banks embarked on the strongest and most synchronized monetary policy tightening in years. As we report in the latest Bank for International Settlements (BIS) Annual Economic Report, history shows that it typically takes a year for inflation to return to its previous level after surges, even during episodes less acute than the one following the pandemic.
Against this backdrop, there is an emerging sense of hope in some quarters that the global economy will achieve a soft, or soft-ish, landing. But we must be ready to tackle the significant risks that cloud this outlook.
One risk is that high inflation could persist. New price pressures could emerge. In many countries, households’ purchasing power has fallen, as wages have not kept pace with inflation. With tight job markets, workers may seek to redress the balance. Firms have found it easier to raise prices and may pass higher costs on to consumers, creating a vicious cycle. Once this sets in, it is hard to stop.
Meanwhile, risks to financial stability loom. Debt and asset prices exceed those in past periods of interest-rate hikes. So far, there are still buffers from pandemic-era savings and longer loan terms locked in during years of low borrowing costs. But these buffers are depleting. As they exhaust, growth could slow more than currently expected.
The resulting financial strains will likely come through credit losses. Weak banks risk losing their footing. Historically, banking stress often goes in tandem with higher interest rates. High debt, high asset prices and high inflation add to the risks. The current episode ticks all the boxes. Although banks are stronger than before, pockets of vulnerability remain, especially where rules to make banks stronger were not applied to smaller banks. As recent experience has shown, even small institutions can trigger systemic collapses in confidence.
Non-bank financial institutions will also be challenged. These types of investment firms have grown in leaps and bounds since the Great Financial Crisis. They are rife with hidden leverage and liquidity mismatches. Business models that worked in the era of low-for-long rates will face stern tests in a higher-for-longer one.
Shaky government coffers cloud the picture further. Financial instability, if acute enough, forces governments to step in to backstop markets. And it delivers a growth hit that weakens fiscal revenues. This would heighten already high public debt levels. In turn, any doubts about the government’s ability to pay its bills add to financial instability.
How should policy makers respond to these challenges? The task of central banks is clear: They must restore price stability. A shift to permanent high inflation would have enormous costs, especially for the most vulnerable in our societies.
To give central banks more room to fight inflation, extra measures must kick in to ensure the safety and stability of the financial system and institutions. Where gaps exist, new regulations may be required. Working together, central banks and governments should keep macroprudential policies tight, as this can limit the strains higher rates place on banks. And stiffer bank supervision could remedy some of the faults that came to light in recent bank failures. We urge policy makers to implement without further delay Basel III, the international standards for banks set in response to the 2008 financial crisis.
Fiscal policy must consolidate. This too would help in the fight against inflation and bolster financial resiliency. And it would provide badly-needed buffers that could be deployed against future downturns.
Above all, policy needs to take a longer-term view. Monetary and fiscal policies have carried too much of the burden of sustaining economic growth. As a result, they have severely tested the limits of what we call the region of stability – the mix of monetary and fiscal policy that fosters enduring economic and financial stability and defuses the inevitable tensions between them. History shows that overstepping these boundaries can trigger high inflation, economic slumps and banking, currency or sovereign crises.
Policy makers must be realistic about what they can achieve. High inflation and financial instability did not emerge by accident. They were the result of a long journey, reflecting in no small part an overly ambitious view of monetary policy’s ability to hit a small inflation target and a more general belief that macroeconomic policy could support growth indefinitely, without stoking inflation.
Mindsets need to change. They must recognize the shortcomings of repeated emergency action, which stimulates output in downturns but fails to rebuild buffers when growth resumes. To drive long-term economic prosperity, governments need to reinvigorate long-neglected structural reforms.
Without a reality check, we risk losing the trust that society needs to have in policy making. Only price and financial stability can assure wider economic prosperity over the longer term.
OTTAWA – The parliamentary budget officer says the federal government likely failed to keep its deficit below its promised $40 billion cap in the last fiscal year.
However the PBO also projects in its latest economic and fiscal outlook today that weak economic growth this year will begin to rebound in 2025.
The budget watchdog estimates in its report that the federal government posted a $46.8 billion deficit for the 2023-24 fiscal year.
Finance Minister Chrystia Freeland pledged a year ago to keep the deficit capped at $40 billion and in her spring budget said the deficit for 2023-24 stayed in line with that promise.
The final tally of the last year’s deficit will be confirmed when the government publishes its annual public accounts report this fall.
The PBO says economic growth will remain tepid this year but will rebound in 2025 as the Bank of Canada’s interest rate cuts stimulate spending and business investment.
This report by The Canadian Press was first published Oct. 17, 2024.
OTTAWA – Statistics Canada says the level of food insecurity increased in 2022 as inflation hit peak levels.
In a report using data from the Canadian community health survey, the agency says 15.6 per cent of households experienced some level of food insecurity in 2022 after being relatively stable from 2017 to 2021.
The reading was up from 9.6 per cent in 2017 and 11.6 per cent in 2018.
Statistics Canada says the prevalence of household food insecurity was slightly lower and stable during the pandemic years as it fell to 8.5 per cent in the fall of 2020 and 9.1 per cent in 2021.
In addition to an increase in the prevalence of food insecurity in 2022, the agency says there was an increase in the severity as more households reported moderate or severe food insecurity.
It also noted an increase in the number of Canadians living in moderately or severely food insecure households was also seen in the Canadian income survey data collected in the first half of 2023.
This report by The Canadian Press was first published Oct 16, 2024.
OTTAWA – Statistics Canada says manufacturing sales in August fell to their lowest level since January 2022 as sales in the primary metal and petroleum and coal product subsectors fell.
The agency says manufacturing sales fell 1.3 per cent to $69.4 billion in August, after rising 1.1 per cent in July.
The drop came as sales in the primary metal subsector dropped 6.4 per cent to $5.3 billion in August, on lower prices and lower volumes.
Sales in the petroleum and coal product subsector fell 3.7 per cent to $7.8 billion in August on lower prices.
Meanwhile, sales of aerospace products and parts rose 7.3 per cent to $2.7 billion in August and wood product sales increased 3.8 per cent to $3.1 billion.
Overall manufacturing sales in constant dollars fell 0.8 per cent in August.
This report by The Canadian Press was first published Oct. 16, 2024.
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