Global banking lobby group, the Institute of International Finance (IIF), warns that the global economic recovery is too reliant on the cheap money being supplied by the world’s central banks.
The IIF says that the recovery so far has “been heavily reliant” on the loose monetary policy conditions being pursued by central banks.” These conditions – quantitative easing, very low interest rates – cannot last forever, but the risk is that financial markets have become addicted to them,” it says, characterizing the new high hit by the Dow Jones Industrial Average this week as “more a reflection of these relaxed international monetary conditions than a signal of strong recovery in the ‘real’ economy.”
“The longer central bank liquidity is relied on to hold things together, the more excesses and distortions are being accumulated in the financial system. An eventual unwinding of these excesses will become a destabilizing risk event,” it warns.
At the same time, the IIF also warns that “political and policy uncertainties have intensified” in the last month, which has strengthened the headwinds against economic recovery. In particular, it points to four major uncertainties: the hung parliament in Italy in the wake of recent elections; the U.S. fiscal situation and the sharp divisions within the US Federal Open Market Committee over whether or not to sustain the current round of quantitative easing; Japan’s efforts to overcome 15 years of deflation; and the risks to China’s ‘soft landing’.
The IIF says this political deadlock represents a risk to the financial market stabilization central banks have been providing. “The critical problem resulting from prolonged political stalemate is that essential policy reforms could be delayed – with the consequence that wider investor confidence may be undermined,” it says.