BIS -夯实未来发展根基 Strengthening foundations for the future

1

Strengtheningfoundationsforthefuture

SpeechbyPabloHernándezdeCos

GeneralManager,BankforInternationalSettlements

ontheoccasionoftheBank’sAnnualGeneralMeetinginBaselon28June2026

Ladiesandgentlemen

WelcometothepresentationofourAnnualEconomicReportfor2026.

TheReportisourflagshippublication,wherewesetoutourperspectivesonkeydevelopmentsandchallengesfacingpolicymakersaroundtheworld.

ChapterIreviewsthepastyearthroughtwolenses:“progress”and“peril”.Progressisseenin

rapidadvancesinartificialintelligence(AI)andtheirpotentialtoboosteconomicactivity;andperilarisesfromheightenedinflationarypressures,financialvulnerabilities–includingthoserelatedtoAIexuberance–andhighpublicdebt,allofwhichweighontheoutlook.

ChapterIIdelvesmoredeeplyintothechallengescentralbanksfacefromhistoricallyhighpublicdebtandevolvingfinancialmarkets.

Topreservemacroeconomicandfinancialstabilityinthisenvironment,allpolicydomainshavearoletoplay.Disciplineineachdomainexpandstheroomthattheothershavetoact.

ThisoverarchingmessagealsoappliestoChapterIIIoftheReport,whichFrankwillpresent.Inthatchapter,weexplainwhydigitalinnovationinmonetaryinstrumentswillbearfruitonlyifrootedininstitutionalfeaturesthathavestoodthetestoftime.

LetmestartwithChapterI.

Progressandperil

Thepast12monthshavebeeneventful.Ayearago,manyfearedthathighertariffswouldslowglobalgrowthandtradesignificantly,especiallyintheUnitedStatesandamongitsclosetradingpartners,asshownintheredbarsinGraph1.Fortunately,aswenowknow,theglobaleconomyprovedresilient,forthreemainreasons.

2

Growthinitiallydowngradedontariffs,butlaterrevisedup

InpercentagepointsGraph1

EMEs

0.5

0.0

_0.5

_1.0

AEs

USCAGBJPEAMXINBRIDCN

Revisionstocurrentyeargrowthin2025:Jan–Apr2025Apr–Dec2025Sources:ConsensusEconomics;BIS.

First,effectivetariffrateswerelowerthaninitiallyfeared.ThepeakannouncedUStariffratewas

morethan25%.But,duetotradedealsandexemptions,theeffectiverateendedupcloserto10%onaverage,asyoucanseebycomparingtheblueandredlinesinGraph2.A.Theselowerthan

expectedtariffsaccountforaboutathirdoftheupwardrevisionsto2025growth,shownbytheredbarsinGraph2.B.

Severaloffsetsmutedtheimpactoftariffs

Graph2

AEfftitifftfllhtf

.ecvearraesesoroofficiallyannouncedrates

%

25

20

15

10

5

0Q225Q425Q226

Effectivetariffrate

Announcement

BSlliffdddii

.maertarsantraeversonmoderatedtheoutputimpact1

%

0.0

_0.3

_0.6

_0.9

_1.2GlobalUSChinaEUASEAN

C.AI-relatedinvestmentprovidedalift

yoy,%

3.5

3.0

2.5

2.0

1.5

1.0Q325Q425Q126Q226

One-year-aheadforecastedgrowth:USinvestment

--Asianexports2

Tariffs‘impactonoutput:

EstimateasofAug2025

Smallertariffshockrevision

Tradediversionrevision

Currentestimate(Apr2026)

ASEAN=AssociationofSoutheastAsianNations.

1Redandbluebarscapture,respectively,upwardrevisionsduetolowerrealisedtariffrates(basedonTheBudgetLabestimatesasofApril2026)andgreatercross-countrysubstitutionassociatedwithtradediversion.2GDP-PPPweightedaverageofKR,MY,SGandTH.

Sources:HZhao,“Assessingthemacroeconomicimpactsofthe2025UStariffs”,BISWorkingPapers,no1316,2025;IMF;PennWhartonBudgetModel;TheBudgetLabatYale;FocusEconomics;BIS.

3

Second,firmsadaptedquickly.Theyfront-loadedshipments,reroutedandtrans-shippedtrade

andabsorbedpartofthecostincreasesintheirmargins.Thishelpedcushiontheimpactoftariffsongrowthandinflation,atleasttemporarily.

Third,asurgeinoptimismaboutAIspurredacapitalexpenditureboomonAI-related

infrastructure.TheeffectswerefeltmostkeenlyintheUnitedStatesbutalsohadaglobalspilloveralongtheAIsupplychain.AsyoucanseeinGraph2.C,thereweresignificantupwardrevisionstoUSinvestmentandAsianexports.Thesameoptimismalsobuoyedriskappetiteandkeptglobal

financialconditionsloose,despitehighpolicyuncertaintyandgeopoliticaltensions.Thistailwindisstillverymuchatworktoday.

Together,thesethreefactorscontributedtostrongupwardgrowthrevisionsinthesecondhalfoflastyear,asshowninthebluebarsinGraph1.Bytheendof2025,globalgrowthwascloseto

whathadbeenexpectedbeforethetariffswereannounced.

Theglobaleconomyentered2026withsolidmomentum,whichcontinueduntiltheoutbreakofconflictintheMiddleEast.Theconflictmarkedanewnegativesupplyshock,continuingastringofsucheventssincetheCovid-19pandemic.

Anditwasamajorshock.ThereductionintheoilsupplyfollowingtheclosureoftheStraitof

Hormuzwasunprecedented.Involumeterms,itwaslargerthanthe1970senergycrises,asshowninGraph3.A.Theconflictledtodowngradesinthegrowthprojectionsacrosscountries,asshowninGraph3.B.

OutbreakofMiddleEastconflictweighedonoutlookGraph3

A.MiddleEastconflictledtohistoricenergysupplycut1

%ptsAEsEMEs

0.5

0.0

_0.5

_1.0

USCAGBJPEAMXINBRIDCN

Revisionstocurrentyeargrowth:

2025:Jan–AprApr–Dec2026:Jan–May

B.Growthprojectionswerereviseddowninresponse

%

%ofglobalcrudeoilsupply

400

16LhsRhs

300

12

200

8

100

4

0

0

Pricechange

Iraq-Kuwait1990Iranconflict2026

Supplycut

Oilembargo1973Iranrevolution1979

1Peaksupplycutsdividedbyaverageofglobalcrudeoilsupplyinthethreemonthspriortotheevent.PricechangescalculatedfromthemonthpriortotheeventtopeakusingSaudiArabianLightoilbenchmark(until1980),datedBrentpricessourcedfromWorldBankCommodityPriceData(1990episode)andtheBrentcrudepromptpricefordeliveryin10daysattheSullomVoeterminal(2026episode).

Sources:WorldBank;USEnergyInformationAdministration;ConsensusEconomics;Kpler;LSEGDatastream;LSEGWorkspace;Macrobond;BIS.

4

Nonetheless,financialmarketsremainedbuoyant.Equitypricessurgedandoilfuturespriceswererestrained,inlargepartduetoexpectationsofaswiftresolutiontotheconflict.Signsthatthe

StraitofHormuzmightsoonreopenonasustainablebasishavebroughtfurtherrelieftofinancialmarkets.

However,evenifthereopeningoftheStraitofHormuzisconfirmed,weshouldnotbe

complacent.Theconflict’seffectscouldlinger.Theprolongedproductionpauseacrosstheregion,asshowninGraph4.A,couldcomplicateanddelaytheramp-upofoutput.Repairingdamaged

facilitiesandnormalisingshippingtrafficwillalsotaketime.Meanwhile,theneedtorebuilddepletedoilreserves,showninGraph4.B,couldkeepdemandandpricepressureselevated.

PersistenteffectsfromtheconflictGraph4

A.ProlongedHormuzclosureraiseschallengesofB.Rebuildingdepletedreservescouldkeepmarketresumingproduction

millionbarrelsperday

12

10

8

6

4

2

0

OilproductioncutsafterHormuzclosure

SaudiArabiaIraq

Kuwait

Bahrain

Other

Iran

UAE

Qatar

conditionstight1

millionbarrels

2,800

2,700

2,600

2,500Q126Q226Q326Q426

OECDcommercialoilinventories:

2026:2022–25:

ActualRange

Estimate

1OECDcommercialcrudeoilandotherliquidsinventories;EIAforecastsasofJune2026(dashedline)assumingflowsthroughStraitofHormuzslowlystarttoresumeinthethirdquarterof2026.

Sources:USEnergyInformationAdministration(EIA);Kpler;LSEGDatastream;BIS.

Fourpressurepoints

Lookingahead,theglobaloutlookwillbeshapedbyhowthepersistentramificationsofAI

optimismandtheconflictinteractwithexistingvulnerabilities.Inthisyear’sAnnualEconomicReport,wehighlightfourpressurepoints:(i)thereturnofinflation;(ii)risksfromAI-related

exuberance;(iii)amplificationfromexistingfinancialvulnerabilities;and(iv)pressuresonpublicfinance.

Letmediscusseachinturn.

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InflationarypressuresrisingGraph5

MYTH IDBRMX INKR JPEAGBSGCNUS

0.00.51.01.52.02.5

%ptsInflationimpact:

DirectIndirect

A.Signsofrisinginflation1B.Supplychainlinkagescouldamplifyhigherinputprices2

3.0StartofIranconflict→200

2.5150

2.0100

1.550

202420252026

Lhs:Globalinflation

Globalinflationforecastfor2026

Rhs:DatedBrentFertilisersPlastics

yoy,%Jan2026=100

1GlobalinflationandglobalinflationforecastaretheGDP-PPPweightedcross-countryaveragesofheadlineinflationandconsensusforecastsof2026inflation,respectively.Fordetails,seeadditionalnotestoGraph8inChapterIoftheBISAnnualEconomicReport2026.2Theconsumerpriceindex(CPI)inflationimpactofajoint10%priceincreaseinfourinputsectors–oilandgas,refinedpetroleum,chemicalsandplasticproducts.DirecteffectsrefertoshockeditemsintheCPIbasket;indirecteffectscapturepropagationthroughsupplychainlinkages.

Sources:IMF;WorldBank;Bloomberg;ConsensusEconomics;LSEGDatastream;nationaldata;BIS.

First,inflation.AsshowninGraph5.A,globalinflationhasrisenbyonepercentagepointsincetheconflictintheMiddleEastbegan.Evenifthestraitissustainablyreopened,theriskisthatthis

initialincreasepersists.

Supplychainsareakeypropagationchannel.Giventimelagsinproduction,risesinthepricesofkeyinputslikeplasticsandfertilisers–showninGraph5.B–couldcontinuetoexertupward

pressureoninflationevenafterenergyflowsandoilpricesnormalise.

Evenifthesepipelinepressuresthemselvesaretemporary,higherinflationcouldbecomeentrenched.Withmemoriesofthepreviousinflationsurgestillfreshinpeople’smemory,householdandfirminflationexpectationscouldde-anchormorequicklythaninthepast.

Buttherearemitigatingfactors.Economieshavemorelabourmarketslackthanin2021,whichshouldhelpcontainwagepressures.Andthestartingpointforinterestratesismuchhighernowthaninthelastinflationsurge.

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Long-termimplicationsofAI

Graph6

Coding

Consulting

Writing

Softwaredev

Customersupport

A.AIholdspromiseofproductivitygains…1Bbutraisesquestionsaboutlabourmarketdtt2

ProductivitygainsattasklevelTFP

Junior/low-skillRhs:Acemoglu

Senior/high-skillAghion&Bunel

Bergeaud

Filippuccietal

%ptsperyear

0.8

0.6

0.4

0.2

0.0

%

80

60

40

20

0

Lhs:

ajusmens

%

3

2

1

0

_1

_2

Q324Q424Q125Q225Q325

Employment:Productivity:

Cumulativegapbetween

high-andlow-AI-exposedsectors

90%confidenceinterval

AI=artificialintelligence;softwaredev=softwaredevelopers;TFP=totalfactorproductivity.

1Datasourcesfortasklevelproductivitygains:codingoutputfromGambacortaetal(2024);consultanttasksfromDell’Acquaetal(2023);clericaltasksandwritingfromNoyandZhang(2023);softwaredevelopers’productivityfromCuietal(2026);andcustomersupportfromBrynjolfssonetal(2025).2Basedonacross-sectoralperiod-by-periodregressionwherecumulativeproductivity(employment)growthisregressedonQ32024logofproductivity(employment)andQ32024sectoralexposuretoAIintheUnitedStates.

Sources:DAcemoglu,“ThesimplemacroeconomicsofAI”,EconomicPolicy,vol40,no121,2025;PAghionandSBunel,“AIandgrowth:wheredowestand?”,mimeo,2024;ABergeaud,“Thepast,presentandfutureofEuropeanproductivity”,POIDWorkingPaper,no103,2024;EBrynjolfsson,DLiandLRaymond,“GenerativeAIatwork”,QuarterlyJournalofEconomics,vol140,no2,2025;KCui,MDemirer,SJaffe,LMusolff,SPengandTSalz,“TheeffectsofgenerativeAIonhigh-skilledwork:evidencefromthreefieldexperimentswithsoftwaredevelopers”,ManagementScience,2026;FDell’Acqua,EMcFowlandIII,EMollick,HLifshitz-Assaf,KKellogg,SRajendran,LKrayer,FCandelonandKLakhani,“Navigatingthejaggedtechnologicalfrontier:fieldexperimentalevidenceoftheeffectsofAIonknowledgeworkerproductivityandquality”,HarvardBusinessSchoolWorkingPaper,no24-013,2023;FFilippucci,PGalandMSchief,“Miracleormyth?Assessingthemacroeconomicproductivitygainsfromartificialintelligence”,OECDArtificialIntelligencePapers,no29,2024;LGambacorta,HQiu,DReesandSShan,:“GenerativeAIandlabourproductivity:afieldexperimentoncoding”,BISWorkingPapers,no1208,2024;SNoyandWZhang,“Experimentalevidenceontheproductivityeffectsofgenerativeartificialintelligence”,Science,vol381,no6654,2023;nationaldata;BIS.

ThesecondpressurepointrelatestoAI.AIrepresentsthemostconsequentialtechnological

advancementofourgeneration.Overthelongterm,itpromisestoliftproductivityandserveasapowerfulengineforgrowth.Task-levelstudiesconsistentlyindicatethatAIdeliverslargeefficiencygains(Graph6.A).Attheaggregatelevel,theeffectsappearmodestsofar,reflectingchallengesinadoptingthetechnologyatscaleandintegratingitwithproductionprocesses.Still,the

productivitygainsarelikelytoarriveeventually,particularlyifthetechnologyimprovestothepointwhereknowledgecreationcanbeautomated.

ButAIdevelopmentalsoraisesfundamentalquestionsaboutthefutureofworkandincomedistribution.Todate,labourdisplacementshaveyettooccuratscale.Buttherearesignsofpossibleadjustmentstocome.Already,USindustrieswithhigherexposuretoAIrecordloweremploymentgrowththantheirless-exposedcounterparts(Graph6.B).

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Themonetarypolicyimplications,includingforthenaturalrateofinterest(r-star),hingeonhow

thesetensionsareresolved,anissueweexploreinthisyear’sreport.Underfavourablescenarios,whereAIleadstopermanentlyhigherproductivitygrowth,theeconomycansustainhigher

consumptiongrowthandr-starincreases.ButifAI-inducedautomationcrowdsoutlabourincomeandconsumption,sappingincentivestoinnovate,ademandbottleneckmaybecomeabinding

constrainttogrowth.Inthiscase,theinitialriseofr-starduetofasterproductivitygrowthcouldreverseastheweakerdemandchanneltakeshold.

Beyondlabourmarketsandgrowth,AIwillalsohaveimplicationsforinflation.Ifr-starincreasesandmonetarypolicydoesnotkeepup,inflationwilllikelyrise,withtheoppositeconsequencesifr-starfalls.

AIexuberancealsohasimplicationsforthenear-termoutlook.Todate,ithasprovidedanimpetustogrowth,throughbothrealandfinancialchannels.Thequestioniswhetherthiscanbe

sustained.

Oneriskisthatlarge-scaleinvestmentinAIinfrastructurebecomesexcessive,aseachfirmtriestooutcompeterivalsanddominatemarketshare.ThiscouldleavethesectormorevulnerableifAI

underdelivers,possiblybringingthecurrentinvestmentboomtoanabruptendwithlarge

macroeconomicconsequences.Boom-bustinvestmentcyclesoftenaccompanytechnologicalbreakthroughs,asshowninGraph7.Weshouldthereforebalanceoptimismwithcaution.

MlilfbhGh7

Parallelswithhistoricalepisodesoftech-ledinvestmentbooms1

utpesopre-oomtrougrap

4

3

2

1

0

0246810

Yearssincetrough

Pre-boommultiplesofinvestmentduring:

CanalmaniaRailwaymaniaRoaring20sDotcomboomAIboom

1Episodesrefertothefollowingseries,andpre-boomtroughsrefertothefollowingyears.Canalmania=UScanalconstructionspending,1835;railwaymania=GBrealinvestment,1843;roaring20s=USprivatefixedassetinvestment,1921;dotcomboom=USprivatefixedinvestmentininformationprocessingequipmentandsoftware,1995;AIboom=AIhyperscalers’capitalexpenditure,2023.AIhyperscalers’2026capitalexpenditurecollectedfromearningscallsandpressreleases.

Sources:HCranmer,“Canalinvestment,1815–1860”,inWParker(ed),TrendsintheAmericaneconomyinthenineteenthcentury,PrincetonUniversityPress,1960;BankofEngland;FederalReserveBankofStLouis;BankofAmerica;S&PGlobalMarketIntelligence;companies’communications;nationaldata;BIS.

8

FinancialvulnerabilitiesremainGraph8

A.RiskcompensationhasfallenmarkedlyinUSstock

market1

Probabilitydensity

4

3

2

1

0

00.20.40.60.81ProbabilitydensityfunctionoftheSharperatioof

top30S&P500stocks:

Post-pandemicPre-pandemic

B.AIfirms’investmentsareincreasinglyfinancedbydebt2

%

10

8

6

4

2

0

1011121314151617181920212223242526

Shareofgrossnon-financialcorporatedebtissuance:

Hyperscalers

Infrastructureproviders

NFC=non-financialcorporation.

1KerneldistributionsareconstructedusingmonthlySharperatiosofanequallyweightedportfolioofthe30largeststocksintheS&P500.Pre-pandemicperiodcorrespondstoJanuary2014throughDecember2019.Post-pandemicperiodcorrespondstoJanuary2021throughJanuary2026.Sharperatio=excessreturndividedbyvolatility.2Basedondataforninehyperscalersand32globalinfrastructureproviders.

Sources:KennethFrenchDataLibrary;LSEGDatastream,LSEGWorkspace;S&PGlobalMarketIntelligence;BIS.

Thethirdpressurepointcomesfromfinancialvulnerabilities.Easyfinancialconditionsarepartlydrivenbyacompressionofriskpremia,asshowninGraph8.A.StretchedequityvaluationscouldunwindabruptlyandamplifyadversescenarioswhereinterestratesriseorAIpayoffsdisappoint.Thistimearound,alargecorrectioninAI-drivenvaluationscouldcarrymorepronouncedwealtheffectsandsharperdropsinconsumption,ashouseholds’exposuretoequitymarketshasgrownsubstantiallyinrecentdecades.

AIfirms,andtheirrelatedecosystem,havealsoreliedincreasinglyondebttofinancetheir

activities,asshowninGraph8.B.Shouldthecurrentaggressivepaceofcapitalexpenditure

deploymentsloworcometoahalt,borrowersacrossthesupplychainmaystruggletoreplace

lostrevenueandservicetheirdebt.Inadditiontoleverage,theopaqueandcircularfinancing

structuresofsomeAIactivities,aswellasthegrowingfootprintofprivatecredit,furtherhighlightthepotentialforfinancialamplification.Inthisenvironment,asuddenrepricingofcreditrisk–

eithertriggeredbyAIdisappointmentorhigherinterestrates–couldtightenfinancialconditionssignificantly.Thecurrenttensionbetweenexuberantriskappetiteandpersistentmacroeconomicriskscouldthusresolveinadisruptiveway.

Thefinalpressurepointcomesfromgrowingstrainsonpublicfinance.Publicdebtwasona

steadyupwardtrajectorywellbeforetherecentenergycrisisunfolded.Ithasnowreachedlevelsnearpost-WorldWarIIhighsinmanyeconomies,asshowninGraph9.Ongoinggeopolitical

conflictscreatepressuresforadditionalfiscalmeasures.Atthesametime,interestburdensand

refinancingneedsarerising,asshowninGraph10.Interestrategrowthdifferentialshavebecomelessfavourable,addingtothechallengeofputtingpublicfinancesonasustainablepath.

9

AfGDPGh9

Publicdebtisnownearpost-WorldWarIIhighs1

0

19301940195019601970198019902000201020202030

EMEs:

Median/

Interquartilerange/

sapercentageorap

120

80

40

1920

AEs:

//

Thedottedlinesandlightershadedareasindicateforecasts.

1Thesamplecovers27AEsand24EMEs,subjecttodataavailability.General(ifnotavailable,central)governmentdebtatnominal(ifnotavailable,market)value.

Sources:IMF;Finaeon;nationaldata;BIS.

Thelasttwopressurepointsarenotnew.Buttheriskstheyposehavegrownfurtherandcouldsignificantlyinfluencetheenvironmentinwhichcentralbanksoperatefortheforeseeablefuture.WeanalysetheseissuesindepthinChapterIIoftheReport.

Higherpublicdebtiscuttingfiscalspace

AsapercentageofGDPGraph10

A.Interestpaymentsareconstrainingfiscalspace…1AEsEMEs

8

6

4

2

0

_2

OtherCN

JPEA

2025

MXBR

2027

USGBCA

ITFR

Interestpayments:

g

B.…asgovernmentsfacelargefinancingneedsAEsEMEs

USCAFRDEBR

JPITGBCNMX

2026:Governmentdebtmaturin

50

40

30

20

10

0

IN

Headlinedeficit

1Generalgovernment,netinterestpayments;OECD(2026)dataifavailable,IMF(2026)dataotherwise.Fortheregions,GDP-PPPweightedaveragesfor10otherAEsand19otherEMEs.

Sources:IMF;OECD;Bloomberg;BIS.

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Highpublicdebtandshiftingfinancialmarkets

TherisingpublicdebtcanbepartlyattributedtothefiscalresponsetosuccessivemajorshockssuchastheGreatFinancialCrisis(GFC),theCovid-19pandemicandtheenergycrisisfollowingRussia’sinvasionofUkraine.Butitalsoreflectsabroaderchallenge:manycountriesdonot

consolidatesufficientlyineconomicupswings.

Foralongtime,fiscalpolicyinmanycountrieshasbeenasymmetric.Governmentstendtoeaseaggressivelyindownturnsbutdonotrebuildbufferssufficientlywhentimesaregood.FollowingtheGFC,governmentsalsoappeartohavebecomeevenlessresponsivetorisingpublicdebt

levels.

Graph11illustratesbothfeatures:fiscaltighteningingoodtimeshasbeenmuchlessforcefulthaneasinginbadtimes,notablyinadvancedeconomies(Graph11.A);andtheresponseofprimary

balancestohigherdebthasweakenedsincethe2000s(Graph11.B).

Fiscalpolicyisprocyclicalinexpansionsandlessresponsivetodebt1

InpercentagepointsGraph11

1980–99

2005–24

0.0

_0.1AsiaEMEALatAm

EMEs

95%confidenceinterval:

///

Estimate:

///

AEs

0.1

A.DiscretionaryfiscalpolicyisasymmetricovertheB.Primarybalancerespondslesstorisingpublicdebt3businesscycle2

AEsEMEs

Procyclical

95%confidenceinterval:

///

0.0

_0.2

_0.4

_0.6

_0.8

Estimate:

///

Positive

outputgap

Negative

outputgap

Positive

outputgap

Negative

outputgap

Counter-

cyclical

EMEA=Europe,theMiddleEastandAfrica;LatAm=LatinAmerica.

1Thesamplecovers27AEsand24EMEs(seveninAsia,11inEMEAandsixinLatAm).2Thegraphshowsthatwhentheoutputgapisnegativethenthecyclicallyadjustedprimarybalance(CAPB)decreasesforAEsanddoesnotchangeforEMEs.ThisimpliesacountercyclicalresponseoffiscalpolicytothebusinesscycleforAEs.Whentheoutputgapispositive,theCAPBdecreasesforbothAEsandEMEs,implyingaprocyclicalfiscalpolicy.Estimatesarebasedonweightedmeangroupestimatorsforcoefficientsfromcountry-levelregressionsoftheCAPBontheirlaggedvalues,pastpositiveandnegativeoutputgapsandpastdebtlevels.Sampleperiod:1980–2024,subjecttodataavailability.3Basedonpanelregressionsforprimarybalancesagainsttheirlags,theoutputandspendinggapsandthelaggeddebtratiosinteractedwithinterestrate-growthdifferentialsoverawindowof20years,controllingfortimeandcountryfixedeffects.

Sources:IMF;OECD;WorldBank;EuropeanCommission;Finaeon;LSEGDatastream;nationaldata;BIS.

11

Lookingahead,failuretorebuildbuffersingoodtimesposesrisks.Withoutconsolidation,itwillbedifficulttoaccommodatenecessaryorinevitablepublicserviceexpenditures,suchasthose

relatedtoage-relatedsocialspending,criticalinfrastructureinvestmentsandheighteneddefenceneeds.Failingtoadjustwouldresultinevenhigherdebtlevelsthannow.Thepointatwhichsuchdebtbecomesunsustainableisuncertain.Butitwouldbeimprudentforgovernmentstotest

thoselimits.

Compoundingthesechallenges,themarketsthatabsorbthelargervolumeofdebtlookverydifferentfromtwodecadesago.I