- Heightened policy uncertainty and fraying trade ties have weakened the growth outlook, while existing vulnerabilities compound the risks and make economies more prone to inflation pressures.
- While central banks focus on price stability, governments must support structural reforms and manage public finances sustainably to foster growth to meet future needs.
- The increased role of non-banks, including a shift towards financing public debt, brings stronger international transmission of financial conditions and also financial stability risks.
Trade tensions and heightened uncertainty cloud the outlook for growth and inflation and risk exposing deeper fault lines in the global economy and financial system, the Bank for International Settlements said in its flagship economic report. It called on policymakers to step up as a stabilising force.
The BIS’s Annual Economic Report 2025 says prospects for the global economy have become much more uncertain and unpredictable in recent months, with trade disruptions roiling financial markets and threatening to reshape the global economic landscape.
These developments are unfolding in a world already grappling with economic fragmentation, declining productivity, high and rising public debt, and a growing footprint of less regulated nonbank financial institutions. Public policy is crucial as a stabilising force. Policymakers must act decisively on multiple fronts to ensure price stability and promote sustainable economic growth while preserving economic and financial stability.
Agustín Carstens, General Manager
The report analyses vulnerabilities in the real economy and financial system including:
- Shifts towards greater economic fragmentation and protectionism, further exacerbating the decades-long decline in economic and productivity growth across many economies.
- Scars from the post-pandemic inflation surge, which could leave a lasting imprint on household inflation expectations.
- High and rising public debt, increasing the financial system’s vulnerability to interest rate rises while reducing governments’ ability to respond to new shocks.
The report also presents the results of a deep dive into global financial conditions. Structural shifts in the global financial system have led to tighter links between financial markets, reflecting the rapid growth of sovereign bond markets and a bigger role for non-banks such as investment and hedge funds. The greater connectedness is underpinned by the expansion of FX swap markets that allow asset managers to invest globally while hedging currency risk.
The reshaping of the financial system in recent years means that financial conditions are transmitted more swiftly across economies. The increased footprint of non-banks in the financial system in tandem with the growth in bond markets also brings financial stability risks. Institutions and activities that pose similar risks should be regulated with similar stringency.
Hyun Song Shin, Economic Adviser and Head of the Monetary and Economic Department
Other public policy priorities include long overdue structural reforms to address the persistent challenges of low productivity growth and make economies less rigid, the BIS said. Removing barriers to trade would help offset the damage from trade conflicts. Fiscal policy must ensure that the trajectory of public debt is sustainable and restore space for supporting the economy when needed. Central banks must retain their focus on keeping prices stable.
The experience of recent years has been a sharp reminder that price stability is the cornerstone for sustainable growth. For households, price stability means safeguarding the value of their hard-earned money, ensuring that what they save today maintains its worth tomorrow. Stable prices create the foundation for families to plan their futures with confidence, businesses to invest and grow, and economies to thrive. In an era of heightened uncertainty, preserving this foundation is more important than ever.
Agustín Carstens, General Manager
A special chapter, “The next-generation monetary and financial system“, was released on 24 June.
The BIS also publishes its Annual Report 2024/25 today. It highlights the achievements of the BIS’s most recent medium-term strategy, Innovation BIS 2025, and shows how the BIS has supported stakeholders during the year.
