BASEL, Switzerland - June 30, 2008 - The global economy may
be heading for a far deeper crisis than is expected and a bout of deflation in
the world’s biggest economies is now a possibility, according to one of the
world's most highly regarded economic institutions.
The Bank for International Settlements has warned that many in the City and elsewhere may have underestimated the scale of the coming economic downturn in one of its most somber portraits yet of the international financial system.
The Swiss institution - known as the central bankers' bank - issued the alert in its annual report, released today.
It warned that the sub-prime crisis in financial markets was merely a reflection of growing debt burdens in the developed world, which could soon contribute to a deep slowdown.
The warning will cause particular concern among participants in the financial sector, as the BIS was among the earliest major institutions to warn that the world could face a credit crisis and financial slump.
The report draws stark comparisons between the current crisis and a variety of others including the Great Depression.
Most sobering is the report's warning that developed economies including the U.S. and Britain could face deflation.
It said, "The eventual global slowdown could prove to be much greater and longer lasting than would be required to keep inflation under control. This could potentially even lead to deflation, which would evidently be less welcome."
Profitability in financial services is falling at its fastest rate in at least 19 years as the credit crisis continues to hurt, a new study indicates. Over 44% of firms have reported a fall in profits in the quarterly financial services survey released today by the CBI and PricewaterhouseCoopers. It is the worst result since the survey began in 1989.