BIS Annual Economic Report 2021

1 BISA nnual EconomicJune 2021 Report Bank for International Settlements 2021. All rights reserved. Limited extracts may be reproduced or translated provided the source is stated. usBISP romoting global monetary and financial stabilityAnnual EconomicJune 2021 ReportThis publication is available on the BIS website ( ). Bank for International Settlements 2021. All rights reserved. Limited extracts may be reproduced or translated provided the source is 2616-9428 (print) ISSN 2616-9436 (online)ISBN 978-92-9259-481-7 (print) ISBN 978-92-9259-482-4 (online)BIS Annual Economic Report 2021 ContentsA bumpy pandexit .. ixIntroduction .. ixA surprisingly strong but very uneven recovery.

2 IxNear-term prospects .. xPolicy challenges .. xiiNear-term challenges .. xiiLonger-term challenges .. xiiiThe distributional footprint of monetary policy .. xivCentral bank digital currencies .. xviI. Covid and beyond .. 1 The year in retrospect .. 2An incomplete recovery .. 2 Exceptionally accommodative financial conditions .. 7 Box : House prices soar during the Covid-19 pandemic .. 10 The next stage of the pandemic .. 11 The central scenario .. 12 Box : What can we learn from market-based inflation expectations? .. 13 Box : Charting a path to pandexit .. 15 Alternative scenario 1: higher inflation and tighter financial conditions.

3 16 Alternative scenario 2: the recovery stalls, business insolvencies rise .. 19 Box : Aggregate implications of an uneven sectoral recovery .. 21 Box : Covid-19 and the corporate credit loss outlook .. 23 General considerations .. 25 Macroeconomic policy challenges .. 25 Near-term challenges .. 25 Box : Tighter global financial conditions and EMEs .. 27 Longer-term challenges .. 30 Box : Fiscal inflation? .. 32 Securing a durable recovery .. 35II. The distributional footprint of monetary policy .. 39 Poverty and inequality: trends and determinants .. 40 Box : A taxonomy of inequality .. 42 Inequality and monetary policy mandates.

4 44 Inequality and inflation .. 44 Inequality and recessions .. 46 Inequality and the conduct of monetary policy .. 49 The impact of inequality on the transmission of monetary policy .. 49 Monetary policy stance and inequality .. 50 Box : Heterogeneity and distribution in macroeconomic models .. 51 Box : The impact of interest rates on wealth inequality .. 52 Box : Labour markets and the reviews of monetary policy frameworks .. 55iiiBIS Annual Economic Report 2021 Beyond monetary policy .. 56 Macroeconomic stability .. 56 Structural inequality .. 57 Central banks non-monetary hats .. 58 Box : Fiscal policy and inequality.

5 59 Conclusion .. 60 III. CBDCs: an opportunity for the monetary system .. 65 Introduction .. 65 Money in the digital era .. 66 Digital money as a central bank public good .. 70 Box : Project Helvetia exploring the use of wholesale CBDCs .. 71 Box : APIs and the industrial organisation of payments .. 74 CBDC architectures and the financial system .. 77 Identification and privacy in CBDC design .. 82 The international dimension of CBDC issuance .. 85 Conclusion .. 90 Glossary .. 91ivvBIS Annual Economic Report A large recession, but macroeconomic policy support limited the fallout .. Household income held up and firms kept access to credit.

6 Scarring was not as large as initially feared .. Banks profitability declined, but capital ratios rose .. Economic conditions remain weaker than before the pandemic .. An uneven recovery .. After falling early in the pandemic, inflation picked up as cost pressures mounted Credit markets recovered quickly and equity valuations were rich .. Equities rose and the US dollar gained as the reflation trade gathered momentum The central scenario .. Stronger growth, higher inflation and financial tightening .. Slow and uneven vaccination poses a risk to the recovery .. The outlook for corporate credit losses .. Higher debt will weigh on investment and reallocation.

7 Rising debt but debt service cost at historical trough: no reason to worry? .. How have countries successfully lowered public debt? .. Inequality features prominently in central banks communication since the GFC Inequality on the rise amid declining poverty rates .. Structural forces have pushed up inequality .. Inflation erodes income and wealth of the poorest .. The benefits of keeping inflation under control .. The pandemic hit low-income workers harder .. Higher income inequality leads to steeper declines in consumption .. The long-term effects of recessions .. High inequality mutes the impact of monetary policy on activity.

8 The changing nature of the business cycle .. Fiscal policy redistributes income .. As cash use falls and digital payments rise, CBDC projects are moving ahead .. Current forms of digital payments remain expensive .. Consumers do not trust all counterparties equally to handle their data safely .. The monetary system with a retail CBDC .. Forms of digital central bank money .. Deferred wholesale settlement results in credit for payee s bank .. Retail CBDC architectures and central bank-private sector cooperation .. CBDCs can be designed to have a limited financial system footprint like cash today .. A broad range of public and private solutions for a digital ID.

9 Addressing cyber risks and data breaches is key for CBDC design .. Cross-border retail activity is rising, but dollarisation is primarily a trust issue .. Multi-CBDC arrangements can facilitate cross-border payments .. mCBDC models offer an opportunity to improve cross-border payments .. US fiscal stimulus could have large effects .. Comparison of cash, retail FPS and retail CBDCs as payment methods .. Store-of-value properties of cash, CBDCs and bank deposits .. 82viBIS Annual Economic Report 2021 Conventions used in the Annual Economic Reportstd dev standard deviation$ US dollar unless specified otherwisemn millionbn billion (thousand million)trn trillion (thousand billion)% pts percentage pointsbp basis pointslhs, rhs left-hand scale, right-hand scalesa seasonally adjustedsaar seasonally adjusted Annual ratemom month on monthyoy year on yearqoq quarter on not available.

10 Not applicable nil or negligibleComponents may not sum to totals because of term country as used in this publication also covers territorial entities that are not states as understood by international law and practice but for which data are separately and independently Report went to press on 18 June 2021 using data available up to 31 May Annual Economic Report 2021 Country codes AE United Arab EmiratesAR ArgentinaAT AustriaAU AustraliaBA Bosnia and HerzegovinaBE BelgiumBG BulgariaBR BrazilCA CanadaCH Switzerland CL ChileCN China CO ColombiaCY Republic of CyprusCZ Czech Republic DE GermanyDK Denmark DO Dominican RepublicDZ AlgeriaEA euro areaEE Estonia ES SpainEU European UnionFI FinlandFR FranceGB United Kingdom GR GreeceHK Hong Kong SARHR CroatiaHU Hungary ID Indonesia IE IrelandIL IsraelIN India IS Iceland IT Italy JP Japan KR KoreaKW KuwaitKZ KazakhstanLT Lithuania LU LuxembourgLV Latvia LY LibyaMK North MacedoniaMT MaltaMX MexicoMY MalaysiaNG NigeriaNL Netherlands NO Norway NZ New Zealand PA PanamaPE PeruPH