Stocks have risen on expectation of more help from central banks, but an international financial forum warned Sunday that the global recovery can’t just rely on support from the likes of the U.S. Federal Reserve and the European Central Bank to get past its current shaky stretch.
The admonition from the Bank for International Settlements comes as the Fed and the ECB are signaling that more stimulus could be on the way. That message from Fed chair Jay Powell and ECB head Mario Draghi has helped send stock higher in Europe and the S&P 500 in the U.S. to a record high.
The BIS is cautioning that governments need to bring other policies into the game — and that there are risks in relying too much on central bank stimulus such as cuts in interest rates and bond purchases that lower market borrowing costs. Those other policies include government spending where possible on growth-friendly infrastructure as well as pro-growth reforms such as slashing red tape for business.
“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 BIS said in its annual economic report.
BIS General Manager Agustin Carstens warned that while stimulus can help in the short run, it can have side effects further out such as over-inflating asset prices such as stocks and bonds, and feeding less productive zombie firms that wouldn’t survive without cheap borrowing.
Policymakers, he said, need “to be mindful of all those tradeoffs.”
The BIS, a forum for central banks based in Basel, Switzerland, said the service industries and falling unemployment can shore up the ailing global recover in coming months. Rising wages and less unemployment are offsetting a slowdown in manufacturing and global trade.
Still, it said significant risks remain, notably related to trade tensions between the U.S. and China. U.S. President Donald Trump is seeking to reduce China’s trade surplus and has imposed new tariffs, or import taxes, while negotiating for a trade deal. Despite some apparent progress at a meeting between Trump and Chinese President Xi Jinping at the summit of leaders from the Group of 20 countries in Osaka, Japan, there’s uncertainty about the outcome, and whether more tariffs might be coming.
“The trade tensions bring up questions about the viability of existing supply chain structures and the very future of the global trading system,” Carstens said in a speech to the BIS annual meeting Sunday. “It bears repeating: trade wars have no winners, only losers.”
Another risk he identified is high levels of corporate debt.
Carstens pointing to “clear signs of overheating in the corporate sector in a number of advanced countries.” He called attention to the $3 trillion market in so-called leveraged loans — those that are made to already indebted companies and then often sliced up and sold on to investors.
“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.”
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