According to the the Bank for International Settlements (BIS), financial markets are experiencing an “uneasy calm”. The head of the monetary and economic department at BIS emphasised that there are a number of anomalies in the bond market which suggest that “all is not well”. The Bank claimed that a weaker outlook for the global economy and greater sensitivity to US interest rates, coupled with less favourable financial market conditions, heighten the risk of negative spillovers into emerging economies once the Federal Reserve decides to raise interest rates.
A rate rise would potentially strengthen the dollar, meaning that loans to emerging economies, in this currency, would become less affordable. Loans in dollars to these countries, such as India, Brazil and China, doubled since 2009 to over $3tn said BIS. The Bank highlighted that, despite low interest rates, debt service ratios for firms and households have been pushed above their long-run averages due to rising debt levels. This suggests, “…increased risks of financial crises.”
The IMF downgraded its forecast for global economic growth in October, as it warned of a rising risk of a global recession. It reduced its figure for 2015 to 3.1 per cent from 3.3 per cent. The 2016 forecast is down to 3.6 per cent from 3.8 per cent.