(Bloomberg) -- The global economy risks sustained weakness without a change in how it’s run, according to Agustin Carstens, who heads the Bank for International Settlements.
The pandemic and war in Ukraine have proved a “rude awakening” for central banks, which had assumed for too long that supply adjusts automatically and smoothly to shifts in demand, Carstens told the Federal Reserve’s annual Jackson Hole symposium.
He suggests monetary officials focus primarily on tackling inflation but work much more closely with governments, with only the latter able to nurture innovation and resilience, while shepherding necessary institutional, technological and ecological transitions.
“The sooner policy makers recognize the need for a reset and commit to sustainable growth strategies focused on revitalizing the supply side, the stronger and more resilient the global economy will be,” Carstens said. “If we manage to do that, new tailwinds may well develop, with substantial benefits for both growth and price stability.”
He warned the world may be nearing what in aviation is called a “coffin corner” -- where a plane slows below its stall speed and can’t generate enough lift to maintain its altitude.
“It takes skilled piloting to get the aircraft back to a safer, stable place,” the BIS chief said. “Continuing to rely primarily on aggregate demand tools to boost growth in this environment could increase the danger, as higher and harder-to-control inflation could result.”
The world’s economic outlook has darkened of late. After a strong pandemic rebound, many countries are facing recessions because of soaring inflation, the threat of a Russian energy cutoff and slower expansion in China. Just last month, the International Monetary Fund cut its global-growth forecast for 2022 and 2023.
“Central banks cannot hope to smooth out all economic air pockets, and must instead focus first and foremost on keeping inflation low and stable,” Carstens said. “Monetary policy needs to meet the urgent challenge of dealing with the current inflation threat.”
Supply-side factors are likely to continue boosting prices, even as upward pressure from Covid and the war eventually fade, he said. Geopolitics, globalization and demographics -- forces that have restrained inflation in the past -- are set to become headwinds, alongside climate change and the exit from fossil fuels.
“Signs of fragility in supply have been ignored for too long,” Carstens said. “Recent events have shown the dangers of doing this. Reinvigorating productivity growth and enhancing the flexibility and resilience of supply will have to play a larger role in policy debates going forward.”
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World Economy Needs Policy Reset to Revitalize Growth, BIS Says - BNN Bloomberg
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