The Bank for International Settlements (BIS) has issued a stark warning about the fragility of the global economy, highlighting the potential for widespread financial stress. The BIS General Manager Agust'n Carstens stated that in early 2025, the global economy appeared to be on track for a soft landing. Inflation was either on target or converging to central bank targets. Labour markets had largely normalised. The global economy was expanding at a respectable pace. And the mood in financial markets was growing more upbeat. To be sure, challenges were on the horizon for policymakers. But it seemed, for a moment, that the worst was behind us.

However, the outlook has since darkened. The announcement of broad-based US tariffs sent shockwaves through markets. Trade policy changes have been accompanied by the prospect of an ambitious fiscal expansion, questioning of central bank independence, discussions about penalising foreign holders of US securities and challenges to the legal system, among others. The repeated cycle of announcements, adjustments and reversals has fostered an atmosphere of uncertainty and unpredictability.

Carstens further shared that the market reaction was telling. Volatility soared. The U.S. dollar depreciated even as government bond yields rose ' an extraordinary, troubling combination. These unusual dynamics led to speculation in some quarters about the U.S. dollar's long-standing safe haven status. Some of the more extreme policy changes that triggered market reaction seem to have been walked back. This has prompted a recovery in markets. But there is still very little clarity about the eventual scope of trade and other key policies amid the daily flow of ruminations. Reverberations will make their way through the global economy, amplifying existing vulnerabilities. The full impact will take time to show, Carstens noted.

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