The Bank for International Settlements warned in its annual report that escalation of protectionist measures is one possible trigger of global economic slowdown or downturn. It said that “its impact could be very significant, if such escalation was seen as threatening the open multilateral trading system.” And, there are already signs that the these measures and the “ratcheting-up of rhetoric” are “inhibiting investment”. And, trade negotiations would “become more complicated” with recent reversal US Dollar depreciation.
Sudden “decompression” of historically low bond yields, or “snapback” in core sovereign market yields could be another trigger. And, Biassed it could take place “in response to an inflation surprise” and “the perception that central banks will have to tighten more than anticipated. In the US, “the prospective heavy issuance of government debt, combined with the gradual unwinding of central bank purchases, could add to this risk.” BIS also noted that the surprise “need not be a large one”, yet the impact could spread globally.
General reversal in risk appetite is a third possible trigger. And, such reversal could reflect a range of factors, including disappointing profits, the drag of the contraction phase of financial cycles where these have turned, a souring of sentiment vis-à-vis EMEs, or untoward political events threatening stability in some large economies. BIS added that from this perspective, “recent events in the euro area are a source of concern.”
