Mark Carney: Redeeming an unforgiving world Remarks by Mr Mark Carney, Governor of the Bank of England and Chairman of the Financial Stability Board, at the 8th Annual Institute of International Finance G20 conference, Shanghai, 26 February 2016. *  *  *  The global economy risks becoming trapped in a low growth, low inflation, low interest rate equilibrium. For the past seven years, growth has serially disappointed – sometimes spectacularly, as in the depths of the global financial and euro crises; more often than not grindingly as past debts weigh on activity (Chart 1). This underperformance is principally the product of weaker potential supply growth in virtually all G20 economies. 1 It is a reminder that demand stimulus on its own can do little to counteract longer-term forces of demographic change and productivity growth. Chart 1 Serial growth disappointments Actual GDP growth 2011 Dotted lines = Emerging economies Solid lines = Advanced economies  2012  2013  2014  2015  Per cent 8 7 6 5 4 3 2 1  2010  2011  2012  2013  2014  2015  0  Source: IMF. That is not to suggest that such stimulus is without value or impact. Accommodative monetary policy can support activity while parts of the economy delever. Monetary stimulus can avoid hysteresis in the labour market. And monetary stimulus can buy time for structural adjustments which shift activity from public to private, external to domestic, and declining to rising sectors.
Despite a recent recovery, equity markets are still down materially since the start of the year. Volatility has spilled over into corporate bond markets with US high-yield spreads at levels last seen during the euro-area crisis. The default rate implied by the US high-yield CDX index is more than double its long-run average. And sterling and US dollar investment grade corporate bond spreads are more than 75bp higher over the past year. On the back of these concerns, risk premia have increased across the board, with “safe haven” assets and currencies benefitting at the expense of equities, credit and commodities. In this ‘risk off’ environment, correlations across asset classes are up sharply. Falls in market liquidity have contributed to strains in some markets. In treasuries and gilts, spreads between 30-year yields and the equivalent swaps have risen by over 40 basis points since the beginning of 2015. And there has been a widening in the spread between corporate bond yields and CDS premia which may reflect a reduction in arbitrage as dealers conserve their balance sheets. Banking stocks have been particularly hard hit, down about a quarter on average over the past three months, across the advanced economies, prompting some to question whether anything has really changed (Chart 5). This re-pricing likely reflects first and foremost renewed growth worries. Banks have always been high beta to the economy.