Chapter 1 delves into the financial vulnerabilities and imbalances challenging financial stability. With the expectation that monetary policy will continue to ease globally, financial conditions have remained accommodative, emerging markets have remained resilient and asset price volatility has stayed low, on net. However, accommodative financial conditions that keep near-term risks contained also facilitate the buildup of vulnerabilities, such as lofty asset valuations, the global rise in private and government debt, and increased use of leverage by nonbank financial institutions. These vulnerabilities could worsen future downside risks by amplifying adverse shocks, which have become more probable due to the widening disconnect between elevated economic uncertainty and low financial volatility. Furthermore, access to funding for economies with weaker fiscal buffers may become more constrained, and the slowing growth outlook in China, along with fragilities in its financial system, is a key downside risk to the global economy. Pressures on the commercial real estate sector also continue to be acute, and some midsized companies’ borrowings are becoming increasingly strained. These mounting vulnerabilities highlight the urgency for policymakers to address them.
Chapter 1: Steadying the Course: Financial Markets Navigate Uncertainty