BIS Warns of Global Economic Fractures Amid Trade Tensions, Dollar Decline

The global economy is at a critical juncture, according to the Bank for International Settlements (BIS). The institution's annual report, released on Sunday, highlights the increasing tensions in global trade and geopolitical instability, which could expose deep-seated fractures in the global financial system. The report warns that the trade wars and policy shifts driven by the United States are disrupting the long-established global economic order.

The BIS president emphasized that the world is entering a new era marked by heightened uncertainty and unpredictability. This shift is testing public trust in institutions, including central banks. The report notes that recent months have seen a darkening of the global economic outlook, with evidence suggesting that the world economy's resilience to shocks is waning. Factors such as population aging, climate change, geopolitical tensions, and supply chain issues are contributing to a more volatile environment.

The report also points to the lasting impact of post-pandemic inflation on public perceptions of price trends. Additionally, the rising and unsustainable levels of public debt are increasing the financial system's vulnerability to interest rate changes and weakening governments' ability to respond to crises through spending. The BIS president cautioned that this trend cannot continue, especially with the potential for increased military spending to further drive up debt levels.

The report also drew attention to the significant decline in the value of the U.S. dollar this year. Since the beginning of the year, the dollar index has fallen by 10%, which could be the largest drop in the first half of a year since the dollar began floating freely in the early 1970s. While there is no evidence of a mass exodus from U.S. assets, the BIS chief economist acknowledged that it is too early to draw conclusions given the slow pace of actions by sovereign wealth funds and central banks. Short-term analysis indicates that non-U.S. investors are hedging against the dollar's decline, with those holding U.S. Treasury bonds and other U.S. assets contributing significantly to the dollar's fall.

The BIS has previously warned about the rapid rise of so-called stablecoins, highlighting the potential risks they pose to financial stability. The institution's report serves as a crucial gauge of the thoughts of global central bank officials, as it regularly convenes high-level policy-makers from around the world. The BIS president expressed particular concern about the rise of protectionism and trade fragmentation, as these trends exacerbate the long-standing decline in economic and productivity growth.