Global economy improving but threatened by eurozone crisis – OECD

22 May 2012 10:56  [Source: ICIS news]

LONDON (ICIS)--The global economy is gaining momentum but the recovery is fragile and could be derailed by the eurozone debt crisis, the Organisation for Co-operation and Development (OECD) said in its latest economic outlook report on Tuesday.

GDP growth across the OECD member nations is projected to slow from an annual rate of 1.8% in 2011 to 1.6% in 2012, before recovering to 2.2% in 2013, according to the report.

“Private sector demand is expected to push activity up in the United States by 2.4% this year and by a further 2.6% in 2013. In Japan, GDP is expected to expand by 2% in 2012 and 1.5% in 2013,” the OECD said.

“Euro area GDP is forecast to contract by 0.1% this year, before picking up to 0.9% in 2013,” it added.

The OECD said that in Europe, business and household confidence is weak, financial markets are tight and the adverse impacts of fiscal consolidation on near-term growth may be significant, particularly in countries hardest hit by the eurozone crisis.

“Recovery in the healthier economies, while welcome, is not strong enough to offset flat or negative growth elsewhere in Europe. Weak competitiveness must be addressed in those countries with large external deficits, while structural adjustment and higher wages in surplus countries would contribute to a growth-friendly rebalancing process,” the OECD added.

"Adjustments in the euro area are now taking place in an environment of slow or negative growth and deleveraging, prompting risks of a vicious circle involving high and rising sovereign indebtedness, weak banking systems, excessive fiscal consolidation and lower growth," it said.

Ahead of this week's EU summit in Brussels, the OECD said leaders could stimulate growth by comprehensive structural reforms in areas such as education, innovation, competition and green growth and through further enhancing the firewall to prevent contagion of the eurozone financial crisis.

It also said boosting the European single market to support additional economic activity, increasing European Investment Bank funding for infrastructure projects and making better use of European Central Bank balance sheets would also encourage growth.  

The OECD added that failure to act today could lead to a worsening of the European crisis and spillovers beyond the eurozone, with serious consequences for the global economy.

“Avoiding such a scenario requires action to be taken both at country and supranational level,” the OECD said.

“Fiscal consolidation and structural measures must proceed hand in hand, to make the adjustment process as growth-friendly as possible,” it added.

The OECD said that finding a careful balance between spending cuts and revenue increases is critically important.

It added that the reform agenda must also be specifically targeted at supporting employment, reducing inequalities and protecting the weakest segments of the population.

"With slow growth, high unemployment and limited room for manoeuvre regarding macroeconomic policy space, structural reforms are the short-run remedy to spur growth and boost confidence,” OECD secretary-general Angel Gurría said during the launch of the report in Paris.

By: Leigh Stringer
+44 208 652 3214

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