E XECUTIVE SUMMARY Financial Stability Report 2021
Main findings Overall, the financial stability outlook has improved since last year’s Financial Stability Report. The faster than expected economic recovery over the past few months has led to a brighter outlook in the real economy which is associated with lower risks of widespread defaults in the non-financial sector. As a result, near-term vulnerabilities have also decreased for the financial sector, with profitability indicators in European banking sectors mostly back at pre-crisis levels. Nevertheless, the financial stability outlook remains highly uncertain, as it strongly depends on the future development of the COVID-19 pandemic and indicators have recently pointed to a weakening global recovery. While Liechtenstein’s GDP declined sharply at the beginning of the COVID-19 pandemic, the eco nomy has recovered faster and more strongly relative to other countries. While Liechtenstein’s GDP is normally characterized by higher volatility compared to larger economies, the sharp recession during the global pandemic was a remarkable exception. The quick rebound in external demand, on the back of the strong recovery in global trade starting in the second half of 2020, was particularly important for Liechtenstein, not only because of the small size of the economy and the minor role of domestic demand, but also because the industrial sector is by far the largest one in the economy. As a result, and contrary to most European economies, Liechtenstein’s GDP has recovered to pre-crisis levels already in the first quarter of 2021. Once again, Liechtenstein’s eco nomy has shown high resilience to the severe global shock, also due to some crucial structural characteristics, including an extremely resilient labor market.
Despite the brightening economic outlook since the start of the year, the pandemic leaves behind a legacy of longer-term vulnerabilities amid significant debt accumulation. Far higher debt levels across sectors – non-financial corporations, households and sovereigns – will require robust economic growth as well as loose financial conditions to remain sustainable. In the current environment, both the economic outlook as well as the near-term path of monetary policy among major central banks are fraught with high uncertainty. In particular, the high inflation pressure, especially in the US, and the increasing tailrisk of those inflation pressures turning out not to be transitory, imply that debt sustainability across countries and sectors may become a pressing issue earlier than currently expected by financial markets. In particular, a sharp rise in financing costs amidst lower than expected economic growth could put sovereign debt dynamics on an unfavorable trajectory, and may trigger renewed concerns of debt sustainability among highly indebted sovereigns. In light of significant inflation pressures, a further tightening of monetary policy seems likely, particularly in the United States. In the US, a tapering of monthly asset purchases in the near future seems likely in light of a strong recovery and headline inflation rates substantially exceeding the Fed’s target. While monetary policy in the euro area as well as in the Swiss franc currency area is expected to remain more accommodative, as price pressures are more muted than in the US, a tightening of US monetary policy may have global implications. A repricing in the US bond market, similar to the developments in 2013 during the “taper tantrum”, could be associated with a repricing of risks across the globe, with significant consequences not only for financial markets, but also for the real economy.
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