Swift and forceful action from central banks and governments has limited the economic damage from the Covid-19 pandemic, and as policymakers look ahead to the next phase of the recovery they must prepare for different but no less formidable challenges, the Bank for International Settlements (BIS) said in its Annual Economic Report 2021. In its flagship economic publication, the BIS describes the global recovery so far as incomplete and uneven, with some countries and sectors bouncing back quickly and others lagging. The uneven recovery could generate headwinds for emerging market economies (EMEs) in particular, due to tighter financial conditions as advanced economies transition more quickly.
In the coming year, issues such as corporate insolvencies and capital and labour reallocation will come to the fore. The report presents a central scenario for the recovery with a temporary increase in inflation, along with two more challenging scenarios. In one, large fiscal stimulus and a drawdown of accumulated savings result in stronger growth but also higher inflation and a substantial tightening in global financial conditions. In the other, growth disappoints as the virus proves harder to control.
Given the uncertainty about the course of the pandemic, monetary and fiscal policies will need to provide support while remaining flexible and retaining policy headroom. In addition, they must facilitate the reallocation of resources in the light of pandemic-induced shifts in demand.
The unprecedented starting point, in terms of exceptionally low interest rates and exceptionally high debt levels, makes this a challenging task. Raising potential growth is essential, and can only be done through forceful and continued structural reforms.
The report also analyses:
- The outlook for inflation and links with fiscal deficits and market expectations
- The impact of tighter global financial conditions on EMEs
- The drivers of sharp increases in house prices and associated risks ahead
- The implications of vaccine rollouts and improved Covid-19 treatment for economic recovery
In addition, the report addresses rising income and wealth inequality, which have been exacerbated by the pandemic. It analyses the structural causes of inequality, including globalisation and technology, and monetary policy’s role in mitigating them.
The changing nature of the business cycle and the greater frequency of financial recessions complicates this task, the report says. So it is more important than ever that fiscal, prudential and structural policies play a complementary role in stabilising the economy.
Source: BIS
