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BIS: Financial Turmoil, Inflation Put Global Economy in Peril

The global economy is in a precarious situation caused by the ongoing turmoil in financial markets and rising inflation worldwide, said a new report from the Bank for International Settlements.

GENEVA — The global economy is in a precarious situation caused by the ongoing turmoil in financial markets and rising inflation worldwide, said a new report from the Bank for International Settlements.

“With a significant risk of recession in the United States, compounded by sharply rising inflation in many countries, fears are building that the global economy may be at some kind of tipping point,” said the report.

Malcolm Knight, BIS general manager, said: “The threat posed by the resurgence of inflation has come just at the time when downside risks to global growth from the sharp rise in oil prices and tightening credit conditions in some key economies have increased.”

In a speech Monday at the bank’s annual meeting in Basel, Switzerland, Knight said there “must be a forceful response to confront the danger that inflation expectations could rise appreciably.” He said global inflation “is now around 4.7 percent and depending on the path of oil and food prices, could go higher in the months ahead.”

If the U.S. economic slowdown deepens, exports from emerging market economies such as China could be significantly affected, the BIS report said.

Knight stressed that collateral effects from lower equity and housing prices could further dampen consumption. Consumer and business confidence has fallen in the U.S., Japan and Europe.

“So far, the financial turmoil has had its main negative impact on growth and growth expectations in the United States,” he said.

For China, which depends on the U.S. market for 20 percent of its exports, the report noted, it would result in a “lowering of direct demand for Chinese exports” and also for China’s imports of intermediate goods from other emerging nations that are used as inputs for export-oriented products.

The Basel-based BIS, known as the central bankers’ central bank, also flagged concerns about a further slide of the dollar, which has so far declined “remarkably orderly.”

“However, this should not be a guide for the future,” said the report. “Foreign investors in U.S. dollar assets have seen big losses….While, unlikely, indeed highly improbable for public sector investors, a sudden rush for the exits cannot be ruled out completely.”

BIS economists feel the weaker dollar “will continue to support U.S. growth by raising exports and demand for goods produced by domestic import-competing sectors.” But the downside is that an abrupt fall in the currency could lead to “higher inflation expectations and make it harder to control inflation.”

In the year ended April 30, domestic energy prices in the U.S. increased 15 percent and food and beverage price inflation “reached an almost two-decade high of about 5 percent.” The report projected that if the expansion in long-run demand continues to outpace the supply of key commodities, “a sustained increase in food and energy prices remains a distinct possibility.” It also expected higher producer prices to “feed through to the retail level.”

Eurostat, the statistical service of the European Union, said Monday it estimates inflation to be 4 percent in June, up from 3.7 percent in May. In most emerging economies, rising inflation, noted the report, “is already a reality.” The study underscored that some also see a clear potential for wage and inflation expectations “to rise significantly.”

“Higher prices have already cut real consumer wages almost everywhere,” the BIS said.

The report maintained that the downward pressures of globalization “might be decreasing or even reversing.” It noted that wages have been increasing rapidly in some low-cost nations such as China and “this has tended to push up the prices of manufactured goods imported from emerging economies.” The report added that “the catching up” of emerging market economies is likely to involve “sustained upward pressures on import prices.”

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