Five years on from the peak of the financial crisis, robust, self-sustaining, balanced growth still eludes the global economy says the Bank of International Settlements (BIS).
In its annual report, the BIS notes that over the period central banks in advanced economies have lowered policy rates to essentially zero and expanded their balance sheets to staggering levels. Yet it is becoming increasingly clear that central banks cannot do ‘whatever it takes’ to return still-sluggish economies to strong and sustainable growth.
Instead, central bank accommodation has borrowed time for others to act, allowing them to repair balance sheets, consolidate fiscal balances and enact reforms to restore productivity growth. The time needs to be used wisely says the BIS but so far, continued low interest rates and unconventional monetary policies have made it easy for the private sector to postpone deleveraging, easy for the government to finance deficits, and easy for the authorities to delay needed reforms in the real economy and in the financial system.
The BIS concedes that in some countries households have made headway with the gruelling task of deleveraging, while some financial institutions are better capitalised and some fiscal authorities have begun painful but essential consolidation. Much of the difficult work of financial reform has therefore been completed but, overall, progress has been slow, halting and uneven across countries.
Unfortunately, central banks cannot do more without compounding the risks they have already created. Monetary stimulus alone cannot put economies on a path to robust, self-sustaining growth, because the roots of the problem preventing such growth are not monetary. Instead, central banks must re-emphasise their traditional focus – albeit expanded to include financial stability – encouraging needed adjustments rather than retarding them with near-zero interest rates and purchases of ever larger quantities of government securities.
The BIS suggests that it is others that need to act, speeding up the hard but essential reform and repair work to unlock productivity and employment growth. Continuing to wait will not make things any easier, particularly as public support and patience erode.
“Our message is simple. Authorities need to hasten labour and product market reforms so that economic resources can shift more easily to high-productivity sectors. Households and firms have to complete the difficult job of repairing their balance sheets, and governments must intensify their efforts to ensure the sustainability of their finances,” the BIS concludes.
“Regulators have to adapt the rules to a financial system that is becoming increasingly interconnected and complex and ensure that banks have sufficient capital and liquidity buffers to match the associated risks. Each country needs to tailor the reform agenda to maximise its chances of success without endangering the ongoing economic recovery. But, in the end, only a forceful programme of repair and reform will return economies to strong and sustainable real growth.”
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