Slower growth in many emerging markets could put those countries on a more sustainable growth path but it also means that they won’t help support the global economy as much as in recent years, according to the chief economist of the influential Bank for International Settlements (BIS).
Despite the rally in financial markets since late July, BIS Economic Advisor Stephen Cecchetti warned investors against complacency as the pace of recovery in the global economy remains disappointing and there are signs of slower growth in emerging market economies.
“This could be a welcome moderation that helps put growth in these economies on a more sustained footing but even so it means that the emerging market economies won’t support global growth as much as they have in recent years,” Cecchetti said in connection with publication of the latest BIS Quarterly Review.
European Central Bank (ECB) President Mario Draghi sparked the rise in global financial markets in late July when he assured investors the ECB would do “whatever it takes” to protect the euro. Earlier this month the ECB said it would buy an unlimited amount of bonds of euro zone member states if needed.
But the rise in markets, which has driven down corporate bond spreads to their lowest level in year, should not obscure the fact that the fundamental weaknesses of Southern European countries remains in place and only structural solutions can solve their competitiveness and fiscal problems, Cecchetti said.
Despite progress in reforming the global financial system, Cecchetti said that process is far from complete and many banks still rely on central banks for funding and activity in unsecured interbank markets remains low.
Nevertheless, international banks are now smaller, less leveraged and less connected to each other than five years ago.
More fragmented banking systems across national boundaries could mean a return to more sustainable levels of banking, Cecchetti said, but cautioned that this could trigger new problems “if the pendulum swings too far and markets become overly fragmented.”
“It reduces the scope for contagion but also increases the risk of domestic crises and reduces the ability to share risks across borders,” he added.