OECD lowers growth forecasts, blames euro crisis

Written by Bloomberg | Updated: Nov 29 2011, 08:46am hrs
The Organisation for Economic Cooperation and Development said growing doubt about the survival of Europes monetary union has caused global growth to stall and represents the main risk to the world economy. The 34 OECD nations will expand 1.9% this year and 1.6% next, down from 2.3% and 2.8% predicted in May, the organisation said in its global economic outlook released on Monday.

Scepticism has grown that euro-area policy makers can deal effectively with the key challenges they face, OECD chief economist Pier Carlo Padoan wrote in the report. Serious downside risks remain, linked to loss of confidence in sovereign-debt markets and the monetary union itself.

The remarks are the first from a major government body to highlight the possibility of a euro breakup and reflect the shift in crisis from the regions periphery to its so-called core. The euro-area crisis represents the key risk to the world economy, the OECD said. Contagion has entered a new phase and spread beyond euro-area normally seen as fiscally vulnerable, suggesting that fiscal concerns are no longer the only driving force behind contagion.

The OECD weighed in on a tussle about how involved the European Central Bank should be in crisis fighting, saying the lender needs to cut interest rates and to expand its balance sheet. The EFSF also needs to be strengthened, it said. Decisive policies and the appropriate institutional responses will have to be put in place to ensure smooth financing at reasonable interest rates for sovereigns, Padoan wrote. This calls for rapid, credible and substantial increases in the capacity of the EFSF together with or including greater use of the ECB balance sheet.

Germany and the ECB have resisted calls for an expansion of its bond-buying program, while France and economists have urged the lender to do more to calm government bond markets.

The euro area itself is already in a mild recession, with the region set to register growth of 1.6% this year and just 0.2% in 2012. Gross domestic product will expand by 1.4% in 2013, it said. That compares with expected growth of 1.7% this year and 2% next year in the US. Japan will shrink 0.3% this year before growing 2% in 2012 and 1.6% in 2013, the OECD said.