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IMF calls for urgent action to reverse global trade slowdown

dubai - Fund calls for immediate action to stop low inflation from triggering weak growth

The International Monetary Fund (IMF) on Tuesday called for immediate action to reverse a slowdown in trade and stop low inflation from triggering a downward spiral of weak growth amid job cuts and higher debt as the World Trade Organisation (WTO) sounded the alarm over falling volumes of trade around the world.

The IMF, which released a chapter from its World Economic Outlook, said the remarkable slowdown in trade growth was largely a consequence of falling economic growth.

The Washington-based Fund pointed out that normally trade growth tended to increase far quicker than world gross domestic product (GDP), but that for the past few years, it had been considerably slower.

The WTO said that 2016 would see the weakest trade growth since the financial crisis. It said trade will grow by 1.7 per cent in 2016, compared with its estimate of 2.8 per cent from earlier this year and the weakest number since 2009. The WTO described the dismal figures as a "wake-up call" for policymakers.

According to the analysis by the Fund, a further move away from trade liberalisation was likely to hold back international trade in goods, harm economic development and prolong the global slowdown.

The IMF also called for a comprehensive plan to boost global economic recovery with structural and fiscal policies as it warned that faith in central banks' ability to fight low inflation was diminishing in economies where interest rates were already close to zero.

"The current environment of low inflation has been largely a product of falling commodity prices and subdued tradeable goods prices, with inflation expectations not much affected yet," the IMF said.

According to the Fund, more aggressive action was needed in economies where low inflation expectations risked becoming entrenched, including a credible and transparent commitment by central bankers to deliberately overshoot targets in order to raise inflation more quickly.

"An environment of subdued but positive inflation could carry significant economic costs even if a deflation trap is avoided," the IMF said.

It warned that "eventually, persistent disinflation can lead to costly deflationary cycles where weak demand and deflation reinforce each other, and end up increasing debt burdens and hindering economic activity and job creation."

The IMF's analysis showed three-quarters of the slowdown in trade was due to weaker global activity, but warned that trade barriers such as anti-dumping duties had increased since 2008 and urged countries to "resist protectionism".
The global lender said China needs to revamp its financial regime to reduce possible "spillovers" onto the rest of the world.

The IMF said a more free-floating exchange rate, a transparent mechanism for signalling policy changes and a system to counter vulnerability are all desirable for China in a reminder of Beijing's past policy missteps - from last summer's stock market rout to opaque yuan exchange-rate tweaks that had roiled global markets.

The IMF pointed out that an enhanced status for the yuan means more global responsibility for Beijing, and warned that spillovers from the yuan's exchange rate would have a large impact on commodity and equity prices and on other emerging markets' currencies.

- issacjohn@khaleejtimes.com