Last autumn's crisis was contained successfully, according to the annual report of the Bank for International Settlements (BIS). But it warns of "potentially worrisome trends" and says the current global situation "does not present a comforting environment for policymakers".
As if to underline its concern the sober BIS, based in Basle, headlined the introduction to this year's report "The darker side of market processes". It finds cause for concern in the world economy's reliance on continuing US growth, which has led to a huge US trade deficit. Both the dollar and Wall Street are vulnerable to a sharp fall.
World industrial overcapacity and weak commodity prices mean there is still a danger of recession and even deflation, the report says. Also,many countries are undertaking wholesale financial restructuring.
Urban Backstrom, president of the BIS, warned the bank's annual meeting against complacency yesterday. "The principal risk at this point is that the sense of urgency in both the need to manage current problems and to prevent the emergence of new ones will be lost," he said.
The annual report dismisses the notion that there is now a greater danger of worldwide inflation than deflation. However, the US could be in for a period of "stagflation" - low growth combined with rising inflation - after its remarkable episode of high growth and low inflation. A plunge in the dollar and shares would be the trigger.
Like other international organisations, the bank has little advice for Japan, although Andrew Crockett, its general manager, said there were signs of "gradual improvement".
As for Europe, the document predicts the euro will eventually appreciate. But it warns that the European Central Bank is in greater danger of undershooting rather than overshooting its inflation target. The report implies that interest rates in Europe should fall further, and adds that the need for European governments to stimulate growth through looser fiscal policy cannot be ruled out.
The report concludes: "Exit strategies should now be the preoccupation for all prudent policymakers." In addition to looser macroeconomic policies, supply-side reforms were urgently needed.
And the world must continue with financial reforms launched in the wake of last year's crisis. Emerging nations should use stiff reserve requirements to discourage banks from borrowing short term in foreign currencies, the report says.
The final chapter has the hopeful title: "Finding light among the shadows". However, yesterday's report is the gloomiest official assessment by far of the global outlook.Reuse content