Global economic pressure points call for policy discipline: BIS
- The sustainability of the AI boom, financial vulnerabilities and strained public finances are among pressure points facing the global economy, along with the return of inflation.
- The interplay of record-high public debt with the increasing role of highly-leveraged hedge funds creates a new sovereign-financial stability nexus and poses growing financial stability risks.
- Safeguarding price stability, ensuring fiscal sustainability, strengthening financial stability beyond the banking perimeter and structural reforms must be policy priorities. Discipline in each arm of policy expands the room in which the others have to act.
Economic pressure points pose risks to global growth stemming from vulnerabilities in the financial system, strained public finances and major supply shocks which are still playing out, the Bank for International Settlements (BIS) said in its flagship economic report.
The BIS's Annual Economic Report 2026 said policymakers must prioritise price stability, strengthen financial stability, ensuring sound monetary and fiscal foundations and undertaking reforms to ensure sustainable growth.
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.
Policymakers must act now. Delay will only make the necessary adjustments more costly and increase the chance of difficult trade-offs in the future. By addressing these challenges today, we can help to safeguard the stability of the global economy in the years to come.
Fiscal fragilities, coupled with structural changes in sovereign debt markets, pose a growing risk to financial stability. The expanding role of non-banks, such as hedge funds, can amplify and accelerate the transmission of market stress, especially in some major advanced economies. This creates mounting challenges for central banks.
The report details that up until earlier this year, the global economy had proved resilient, buoyed by optimism around progress in AI and surprisingly strong global trade. AI-related investment and associated expectations of productivity gains stimulated economic activity and kept financial conditions favourable. The historic closure of the Strait of Hormuz then triggered a supply crisis in energy and other raw materials, posing a renewed threat to the global outlook. Despite signs of easing geopolitical tensions and a significant drop in oil prices, the disruption's impact may linger.
The report analyses four pressure points that demand urgent attention:
- Inflation has risen. In a world of more frequent negative supply shocks, a key risk is that higher inflation could become ingrained if inflation expectations de-anchor. This could sustain inflationary pressure even after energy flows and oil prices normalise following the opening of the Straits of Hormuz.
- Optimism surrounding AI may not last, despite its promise of future productivity gains. The current surge in capital expenditure could prove unsustainable if supply bottlenecks restrain production. And intense competition for market leadership may fuel over-investment, as seen in previous innovation waves.
- Financial vulnerabilities remain a concern. Liquidity in core bond markets may be more fragile due to stretched asset valuations and investor complacency. The financing of AI is increasingly leveraged, featuring complex interactions within the AI supply chain.
- Near-record high public debt and higher interest rates are straining fiscal positions in many economies, leaving governments with less room to respond to future recessions or crises.
The new fiscal-financial stability nexus may mean more frequent and sharper drops in sovereign bond values. Such repricing can tighten financial conditions quickly and weigh on demand with uncertain effects on inflation and complicate the calibration of monetary policy. It can also prompt central banks to intervene to calm market stress, with side effects for market and fiscal discipline.
One chapter, "Anchoring trust in money: innovation beyond stablecoins", was released on 23 June.
The BIS also publishes its Annual Report 2025/26 today. It introduces the BIS's new strategy and shows how the BIS has supported stakeholders throughout the year.