Challenges on the Horizon When I think about the road ahead, my number one goal is to keep the expansion on track. This is how we will keep unemployment low and bring inflation back to 2 percent. I will be watching closely at how both domestic and broader, global developments unfold. At present, slowing global growth and geopolitical uncertainty pose particular challenges. In its latest World Economic Outlook report, the International Monetary Fund downgraded its projection for global growth and highlighted downside risks.3 Slower global growth reduces demand for our exports and puts a dampener on both U.S. inflation and growth prospects. And these aren’t just projections for the future—we’re seeing manifestations of slowing growth around the world now. Germany, the UK, and China are all experiencing slowdowns, and the euro area is of particular concern. In response, the European Central Bank and several other central banks have either adjusted, or indicated they will adjust 2/3  BIS central bankers' speeches  their monetary policy stance to support their economies. These concerns about global growth are compounded by broader geopolitical uncertainty. The risk of a no-deal Brexit for the UK is looming large, the political situation in Italy remains fraught, political tensions continue in Hong Kong, and Argentina’s economy is coping with a debt crisis. On our own shores, concerns around trade policy with China are adding to an uncertain picture. My contacts in the business community have said this is making them more cautious about investment.
Those small countries in particular had to accept the new economic reality of lower demand, higher unemployment and forced fiscal consolidation due to a fall in tax income or borrowing difficulties. The other group consists of bigger or more closed economies that were relying on domestic demand. They were able to smooth the initial impact of the crisis with more extensive government support measures. There was also the expectation that the crisis would be temporary. With the benefit of hindsight we know that we were not facing a temporary bump on the road, but a more fundamental need for adjustment. The initial smoothing of the shock may have been even more costly as it resulted in a higher level of public debt. Secondly, the required policy adjustment involves a dimension which we now consider critical: the speed of reacting and the decisiveness of policy actions. The Baltic countries have learned it firsthand through their experience, which of course is the hard way. There are few economists today that would fundamentally question the need for fiscal consolidation and structural reforms in Europe, as the crisis has clearly turned out not to be temporary. However, we all know it is politically difficult to cut government spending and implement reforms fast. The natural tendency for most politicians is to favour gradual adjustment. “Gradualists” say that in case of fast changes the risk of possible policy mistakes is higher, leading to losses in physical and human capital. Opponents of that view, including myself, certainly acknowledge those risks.