A major international financial organization is warning that the world economy faces mounting dangers driven by rising government debt, questions surrounding the artificial intelligence investment wave, and deepening financial fragilities.
The Bank for International Settlements released its Annual Economic Report on Sunday, identifying a complicated web of risks that it says demand swift and coordinated action from policymakers around the globe.
“Policy actions must reinforce each other to avoid a pull and push on the global economy. Ultimately, success depends on sound fiscal and financial foundations,” said BIS General Manager Pablo Hernandez de Cos.
The report zeroes in on four major trouble spots. First, inflation has begun creeping back up, and the BIS cautions that more frequent disruptions to supply chains could cause households and businesses to start expecting persistently higher prices — a situation that would be difficult to reverse.
“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 reporters.
He also noted that the recent ceasefire between the United States and Iran and the reopening of the Strait of Hormuz was “good news” that should help prevent the worst-case scenarios from playing out, though he acknowledged the oil market would likely need time to “normalise.”
The BIS also raised concerns about whether the current flood of investment into artificial intelligence can be sustained. While AI has lifted confidence and helped economic growth through expectations of productivity gains, the organization warned it is also stoking fears about job losses. Additionally, supply bottlenecks and fierce competition could trigger the kind of overinvestment that has historically led to boom-and-bust cycles.
For central banks, the AI surge is raising fundamental questions about how economies will operate going forward, though de Cos said it would currently be “unwise” to be too prescriptive about how they should respond.
Financial vulnerabilities round out the BIS’s list of concerns. High asset prices and signs that investors may be growing too comfortable with risk have left core bond markets in a more fragile state. Meanwhile, the financing behind the AI boom is becoming increasingly dependent on debt and complicated funding arrangements throughout the supply chain.
Record levels of public debt, combined with sovereign bond markets now heavily influenced by large, highly leveraged hedge funds, have created what the BIS calls “a new sovereign-financial stability nexus” — a situation that poses growing dangers.
“The new fiscal-financial stability nexus may mean more frequent and sharper drops in sovereign bond values,” said Frank Smets, acting head of the BIS monetary and economic department, adding that such swings could quickly tighten financial conditions worldwide.
De Cos described the BIS’s overall message as one of “urgency” when it comes to reducing debt in major economies, “because the fact is that today debt is high, and this is financed through non-bank financial intermediaries.”
The organization is urging policymakers to make price stability a top priority, ensure government finances are on a sustainable path, strengthen oversight of financial institutions beyond just traditional banks, and pursue structural reforms.
“Policymakers must act now. Delay will only make the necessary adjustments more costly,” de Cos said.
