In the final week of the year, investors are likely to drop their interest rates to record lows as a global economy tries to regain its footing amid a global recession.
But the latest data from the Bank of International Settlements shows global financial markets remain far more cautious than the previous week.
The global economy is expected to contract by 0.7 per cent this year and by 0 to 0.9 per cent next year, the BIS said in its latest report.
The data came on the same day that the Bank forecast the world’s economic growth for the year would slow to 1.4 per cent.
That would be the lowest growth rate since the recession began in 2007, and it’s a far cry from the 7 per cent growth that the global economy experienced between 2008 and 2017.
The BIS, which provides global economic data to policymakers, said the economic slowdown could be temporary and that the “long-term outlook for global economic activity remains unchanged.”
The BIs main concern is the slowdown in the U.S. dollar, which is expected by the central bank to weaken.
“We expect that U. S. dollar weakness will gradually weaken over the coming months, as U. (exchange) rates have been relatively weak relative to the European central banks (ECBs),” the BIs report said.
“However, we believe that the U-S.
monetary policy is likely to remain accommodative over the medium term and that its negative impact on global economic growth will diminish over time.”
The Bank of England said it expects the U,S.
and European central bankers to be keeping interest rates near zero over the next two years, and the BIC expects the two currencies to strengthen as inflation falls.
But even though inflation is expected rise to 3 per cent by the end of 2020, the UBS index of global stock markets has dropped by more than 30 per cent in the past year, and this is a key reason why the global financial market has been so cautious.
The world’s largest asset managers have cut their prices for most assets by over 30 per to 40 per cent, and investors are cutting their exposure to equities and bonds.
This is a trend that will likely continue as global economies slow and inflation slows, the Bank’s chief economist, Mark Carney, said in a speech last week.
Carney said the outlook for inflation is still “optimistic” and the Bank expects growth in the second half of the decade to be in line with that of the U S. economy.
But with the global economic slowdown continuing and interest rates dropping, the market is unlikely to be able to recover its previous level of risk aversion, which it was able to do in recent years, Carney said.
The Fed has been reducing the size of its bond holdings.
Its balance sheet has dropped to about $1 trillion, and its balance sheet for the next 12 months is $8 trillion.
In the meantime, the Fed has raised rates twice in recent months, and Carney said that the central banks actions are likely contributing to a return to the financial markets that was already evident in the last few months.
“Given the risk aversion associated with equities, this is probably the most important reason why investors have been so conservative in the market, he said.