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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."
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