Acute global risks emanating from high income countries have subsided considerably in terms of likelihood and potential impacts, in part because some of them materialized in less virulent forms than anticipated earlier.
- In the Euro Area, sliding inflation has raised real interest rates, potentially slowing the recovery. Inflation expectations remain anchored so far, but downward adjustments could unleash a pernicious debt-deflation cycle and undermine the ability of monetary policy to support the economy.
- In Japan, the key risks are that the sales tax hike might significantly dent the domestic recovery, while medium-term prospects will depend on the degree to which supply-side reforms succeed in boosting growth.
- In the US, there are signs that the recovery in some asset markets is running ahead of the economic cycle, driven in part by very low interest rates. If conditions stay very loose too long some of the same kind of vulnerabilities that built up prior to the crisis of 2008 could re-emerge.
Increasingly, these risks are being balanced by the possibility of better than expected growth, particularly in the Euro Area, in light of recent monetary support measures announced, and the US. A quickening of the pace of reforms in Japan could also bolster confidence, improving firms’ incentives to invest and increase wages, boosting household incomes and willingness to spend.