Fast growth means increasing prosperity, which in turn may result in a stable social and political climate. However, in order for China to switch from export-led to domestic demand at a quicker pace – which has to happen in the future – it will require institutional and other reforms that take time to implement. The financial infrastructure in particular is in great need of change and development. Where will demand come from when the economy is tightened in the US? The weak growth in Europe and the uncertainty surrounding developments in the Japanese economy means that there is no obvious candidate to take the United States’ place as growth engine. While China has recently become the world’s third biggest trading nation it can hardly assume the mantle on its own. Domestic demand in Europe needs to pick up but the current upswing here is sluggish and is being restrained by efforts to tackle public finance deficits in countries such as Germany, Italy and France. So how likely is it that China will abandon its fixed rate with the dollar in the period ahead? Most commentators believe that China will take a gradual, slow and cautious road towards a floating exchange rate. Should the dollar continue to weaken, therefore, the euro will continue to bear a large part of the adjustment in the future as well, thus having an adverse effect on European competitiveness and growth. 2  BIS Review 10/2005  Another important growth factor is how interest rates develop in the period ahead.
Baldwin attributes the severe and synchronous slump in goods exports to two main factors: first, the uncertainty that was triggered simultaneously around the world by the collapse of Lehman Brothers; second, the strong internationalisation of the value chain. The former led to a concurrent drop in demand, particularly for consumer durables, while the latter resulted in the goods trade volume reacting disproportionately to changes in production. This is because a product can cross national borders several times during the manufacturing process. Demand for services remained relatively robust, however, with the exception of financial services. Cf. also Ingo Borchert and Aaditya Mattoo (2010): Services trade – the collapse that wasn’t. BIS Review 157/2010  1  more, the recovery observed since mid-last year has been comparatively brisk. As a result, by mid-2010, Swiss goods exports had recouped almost two-thirds of the losses suffered. The Swiss National Bank’s decisive action undoubtedly contributed to the fact that the Swiss economy as a whole emerged from the crisis relatively unscathed. The SNB didn’t hesitate to lower interest rates decisively and – like other central banks – to employ unconventional monetary policy measures when required by the legal mandate, once the room for manoeuvre using the traditional interest rate instrument had been exhausted. In particular, we created additional liquidity through the purchase of foreign currency. In doing so, we resisted extreme exchange rate developments that could have initiated a deflationary dynamic and would have had devastating consequences for the Swiss economy.