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BIS warns on trade wars and cheap money

The Bank for International Settlements issued its annual report, warning governments must reduce trade tensions and rely on more than stimulus.

BASEL, Switzerland (AN) — The Bank for International Settlements issued its annual report on Sunday, warning that governments must reduce trade tensions and rely on more than stimulus from central banks to avoid threats to the global economy.

Despite some apparent progress between the United States and China towards possibly resolving their trade differences, the global bank for central banks said U.S. Federal Reserve and European Central Bank stimulus measures through bond-buying or interest rate cuts are not enough of a balm.

“Monetary policy can no longer be the main engine of economic growth, and other policy drivers need to kick in to ensure the global economy achieves sustainable momentum,” the Swiss-based BIS said in its annual economic report.

At the Group of 20 summit in Osaka, Japan, U.S. President Donald Trump met on the sidelines with China's President Xi Jinping to discuss ways of ending their trade war. Trump has imposed new tariffs, however, seeking to lower China’s trade surplus while angling for a new trade deal.

To keep the global economy on track, BIS urged governments to adopt pro-growth measures such as reducing bureaucracy for businesses and greater spending for infrastructure.

A decade after the financial crisis, central banks are treading a narrow and winding path bringing policy back towards more normal settings and managing challenges of the new environment," the global forum for central banks said in its 88-page annual report. "But they lack a time-tested compass to properly navigate this new terrain, with stubbornly low inflation and accumulating side effects from an extended period of low interest rates."

BIS, which also held its annual meeting on Sunday, said business cycles tend to become more fragile as financial cycles peak and "even if financial booms do not end in crises, they tend to herald recessions." It said higher wages and less unemployment have been offsetting a slowdown in manufacturing and trade.

'No winners, only losers'

Agustín Carstens, the general manager of BIS, said that after a decade of gains since the global financial crisis from 2008 to 2009, the pace of expansion has slowed since last year. "While the near-term outlook is still good, there are many vulnerabilities further out," Carstens said in a speech to the BIS annual meeting.

"For the global economy to remain on course towards clear skies, other policies need to play a bigger role and policymakers must take a longer term perspective," he said. "In particular, a better mix is required between monetary policy, fiscal policy, macro prudential measures and structural reforms."

Stocks have risen due to anticipation of more help from central banks, but Carstens said he believed the world now faces a "headwind" of trade tensions, related uncertainties about the future of the multilateral trading system and risks from high levels of corporate debt.

"As well as clouding future demand and affecting investment prospects, the trade tensions bring up questions about the viability of existing supply chain structures and the very future of the global trading system. It bears repeating: trade wars have no winners, only losers," he said.

Carstens also said there were clear signs of overheating in the corporate sector among some wealthy nations, including a US$3 trillion market in so-called leveraged loans to indebted businesses.

“Credit standards have been declining as investors have searched for yield,” he said. “Should the leveraged loans sector deteriorate, the economic impact could be amplified through the banking system.”