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Bank of England (BoE) governor Andrew Bailey has warned that slowing global growth and a fragmenting world economy are increasing risks to financial stability. It comes as trade tensions, industrial policy and domestic political pressures collide.
Speaking at a meeting of the Bellagio Group in London, Bailey said the global economy is entering a more fragile phase as the shift toward a multipolar world strains institutions designed for a more stable, cooperative era.
“One of the lessons of economic history is that such shifts in polarity invariably strain the operation of the system,” he said.
He argued that strong growth has historically made international cooperation workable, allowing governments to liberalise trade and absorb distributional pressures.
“It is easier to operate the international system during conditions of strong growth,” he said, particularly when productivity gains feed directly into living standards.
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He also pointed to a slew of issues weighing on growth, including a prolonged slowdown in productivity, ageing populations, rising defence spending and climate-related economic shocks. Together they form “a powerful force to complicate the operation of the international system”.
The consequences are increasingly visible in trade. Bailey said that the focus of global tensions has shifted away from monetary relations and towards trade, which he described as “more susceptible to domestic pressures” and “more directly blameable” for changes in wages and living standards.
“We cannot assume away the natural tension between economic globalisation and domestic objectives,” he said, adding that trade disputes are more tightly linked to domestic politics and perceptions of fairness than exchange-rate issues,” he added.
Bailey also addressed the resurgence of industrial policy, warning that while macroeconomic factors remain the main drivers of global imbalances, policy choices matter.
Large-scale industrial strategies pursued over long periods, especially alongside closed capital accounts, can have “material short-to-medium-term effects” on trade and financial flows.
The BoE governor said the assessment of global imbalances has become increasingly contentious, stressing that international institutions must be willing to “tell us what we don’t want to hear” and resist what he described as “messenger shooting”.
He added that rising populism is making those two tasks harder. He highlighted a tendency to frame domestic prosperity as being in opposition to openness, to “attribute unfavourable conditions to outside forces”, and to undermine trust in institutions seen as distant or unresponsive.
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For policymakers, Bailey said the response must be practical rather than rhetorical. “We have to challenge back, in deeds more than just words,” while ensuring institutions “have our houses in order too”.
Despite the strains, Bailey defended the role of multilateral institutions, warning that a retreat from cooperation would leave the global economy more fragile. “We must be clear and agreed that a world without effective institutions is unlikely to be stable.”
Looking ahead, Bailey said the next major boost to global growth could come from AI and robotics, which he described as the next potential “discrete rush” in productivity. But he warned that without investment in skills and careful management, the transition could deepen inequality and political backlash.
“Now is not the time to close the world to the benefits of trade,” Bailey said, stressing the importance of financial stability in sustaining growth as the global economy adjusts to shifting power balances.
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