Annual Economic Report 2023

BIS AnnualEconomicReport June2023 ©BankforInternationalSettlements2023.Allrightsreserved. Limitedextractsmaybereproducedortranslatedprovidedthesourceisstated. www.bis.orgemail@bis.org Followus BIS AnnualEconomicReport June2023 Promotingglobalmonetary andfinancialstability ThispublicationisavailableontheBISwebsite(https://www.bis.org/publ/arpdf/ar2023e.htm). ©BankforInternationalSettlements2023.Allrightsreserved Briefexcerptsmaybereproducedortranslatedprovidedthesourceisstated. ISSN2616-9428(print) ISSN2616-9436(online) ISBN978-92-9259-666-8(print) ISBN978-92-9259-667-5(online) Contents Ataleofthreejourneys................................................ ix Introduction.................................................................. ix Themacroeconomicjourney:lookingback...................................... ix Theyearunderreview.................................................... ix Thelonger-termbackdrop................................................. x Themacroeconomicjourney:lookingahead..................................... xi Near-andlonger-termhazards............................................ xii Near-andlonger-termpolicychallenges.................................... xiii Digitalisationandthefinancialsystem:thejourneyahead......................... xv Conclusion................................................................... xvii I.Navigatingthedisinflationjourney................................. 1 Theyearinretrospect......................................................... 2 Inflationmoderates,buttooearlytodeclarevictory......................... 2 Synchronisedmonetarytighteningendslow-for-long........................ 3 Theeconomyslows,butmanagestoavoidrecessionsofar................... 5 Financialsystemshakenbybankfailures.................................... 7 BoxA:SpilloversfromChina’sreopening........................................ 8 BoxB:Risingpolicyratesandtheoutlookforbanks’netinterestmargins........... 11 BoxC:Recentbankfailures.................................................... 12 Keyrisksonaturbulentpath................................................... 14 The“lastmile”mayposethebiggestchallenge.............................. 14 Macro-financialvulnerabilitiescouldcomplicatetheinflationfight............. 19 BoxD:Commercialandresidentialrealestatemarkets............................ 20 BoxE:Structuralchallengesamongglobalbanks:hintsfrommarketvaluations...... 24 Navigatingfromturbulencetosafety........................................... 25 Monetarypolicy.......................................................... 26 Fiscalpolicy.............................................................. 27 Prudentialpolicy......................................................... 28 Structuralpoliciestoenhancesustainablegrowth............................ 30 Endnotes..................................................................... 31 Technicalannex............................................................... 34 References................................................................... 37 II.Monetaryandfiscalpolicy:safeguardingstabilityandtrust... 41 Introduction.................................................................. 41 Policyinteractionsandtheregionofstability.................................... 42 BoxA:Theconsolidatedcentralbank-governmentbudgetconstraint............... 43 Theregionofstability.................................................... 45 BoxB:Theregionofstabilityanditsdeterminants............................... 46 Testingtheboundaries:thelongjourneysofar.................................. 48 Thejourney:fromthe1960stotoday...................................... 48 Thejourney:reinforcingeffects............................................ 51 Thejourney:howdifferentareEMEs?....................................... 52 Testingtheboundaries:risksinthejourneyahead55 Riskstofiscalpositionsandthesovereign’screditworthiness55 BoxC:Fiscallimitsandtheriskstodebtdynamics57 Inflationrisks60 Financialstabilityrisks62 BoxD:Governmentdebtascollateralandmarketfunctioning63 Policyimplications68 Endnotes71 Technicalannex74 References78 III.Blueprintforthefuturemonetarysystem:improvingtheold,enablingthenew85 Introduction85 Tokenisingmoneyandassets88 Tokenisationbasics88 Centralbankdigitalcurrencyandprivatetokenisedmonies89 BoxA:Experimentswithwholesalecentralbankdigitalcurrenciesandtokenisation91 Achievingseamlessinteroperabilitythroughunifiedledgers93 BoxB:Connectingledgersthroughapplicationprogramminginterfaces94 Thebuildingblocksofaunifiedledger96 Usecases:improvingtheold98 BoxC:Messaginginastandardperson-to-personwiretransfer99 BoxD:Streamliningsecuritiessettlementthroughaunifiedledger100 Usecases:enablingthenew100 Guidingprinciplesforaunifiedledger104 Scope,governanceandcompetition104 BoxE:Thetokenisationcontinuum105 Dataprivacyandoperationalresilience106 Conclusion109 Endnotes110 Technicalannex113 References114 Glossary117 Graphs ChapterI 1Headlineinflationabateswhilecoreinflationprove