Global economic outlook mixed, international banker says
Wellink warns policymakers about unfamiliar circumstances

With a number of uncertainties hanging over the global economy, the world economic outlook is mixed, the head of an international banking organization says.

Global economic performance was "lackluster" in 2002 despite significant policy stimulus, and some closely related risks continue to affect the prospects for more vigorous economic recovery, Bank for International Settlements (BIS) President Nout Wellink said June 30 at the bank's annual meeting in Basel, Switzerland.

The BIS is an international organization that works to ensure monetary and financial stability and serves as a bank for central banks.

Wellink said the key question now is whether stimulative policies and consumer spending will lead to more investment without deepening imbalances that "could at some point threaten the sustainability of the expansion."

He cited a decline in oil prices, renewed investor confidence and the recovery of equity markets as "encouraging signs." He said that particularly in the United States the "preconditions for a quickening recovery seem to be largely in place."

But Wellink cautioned that major risks, including "rather optimistic" projections of corporate profitability, global current account imbalances, and possible weakening of the housing market and consumer spending, remain.

The key policy challenge, he said, is to "promote sustainable world growth while facilitating a gradual absorption of the imbalances, real and financial, domestic and international." He said this is particularly important in the slower-growing economies outside the United States.

Wellink warned that policymakers could have to deal with unfamiliar circumstances if deflationary pressure spreads beyond the Asian region. Such a development could not be "ruled out" if economic weakness lasted long enough, he added.

Wellink said that Japanese policymakers have little "ammunition" left while their European counterparts have maneuvering room in monetary policy but very little in the fiscal policy area where options have been "drastically" narrowed by the failure to make the necessary structural reforms.

"Were the euro to appreciate further as part of the global adjustment process, this should be taken as a catalyst for the necessary reform, rather than as an excuse to fall back into dangerous protectionism," Wellink said.

In the United States monetary policy has been approaching the zone where its effectiveness could become "less certain," and fiscal policy has been "rapidly" consuming the budget "cushions ... to the point where questions could be raised about its long-term sustainability," Wellink said.

He said that in the near future the success of economic policies may depend on cooperation between monetary, fiscal and, in some cases, regulatory authorities. And "the global nature of the [economic] challenges is likely to test further the process of international cooperation," Wellink said.

The BIS 2003 annual report released to coincide with the June 30 meeting can be viewed here.

Read Wellink's remarks as delivered >>>