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Global economy 'set for sharp downturn'

Eurozone debt crisis "remains the greatest threat to the world economy at present", the OECD warns.
Last Modified: 27 Nov 2012 21:26
A potentially catastrophic budget standoff in US could threaten business activity around the world [GALLO/GETTY]

Global growth is set for a sharp slowdown next year and the eurozone debt crisis "remains the greatest threat to the world economy at present," the Organisation for Economic Co-operation and Development (OECD) has warned.

"Economic prospects are very uncertain and highly dependent on the risks associated with the nature and timing of policy decisions related to the euro area crisis, [and] the US fiscal cliff"

- OECD analysts

In its latest Economic Outlook, drafted on Tuesday before the eurozone and IMF unblocked almost $57bn (44 billion euros) in emergency loans for Greece, the OECD also cautioned that "the risk of a new major contraction cannot be ruled out" after a global slump in 2009.

The organisation slashed its outlook for the 34-member OECD area, which includes most of the world's industrialised economies, in 2013 to 1.4 per cent from a previously expected level of 2.2 per cent.

On a global level, the Paris-based OECD cut the 2012 growth forecast to 2.9 per cent from 3.4 per cent, and its estimate for 2013 to 3.4 per cent from 4.2 per cent.

Another threat to business activity worldwide is a potentially catastrophic budget standoff in the US, where automatic tax increases and spending cuts are to take effect in January unless polarised Democrat and Republican politicians can come to a compromise.

The world's economic fortunes thus hang next year in large part on the ability of political leaders in Europe and the US to deal with a crippling combination of unsustainable debt and cramped business activity.

Deepening recession

The OECD also downgraded its growth estimates for this year and next for the US and Japan, and its data showed that the eurozone recession could be deeper than last forecast in May.

The 17-nation bloc is "projected to remain in or near recession until well into 2013," the report said.

OECD economies are expected to expand by 1.4 per cent in 2012 and 2013, and then pick up to a pace of 2.3 per cent in 2014.

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Unemployment is forecast to rise from 8.0 per cent this year to 8.2 per cent in 2013 before easing back to 8.0 percent in 2014.

Inflation should decline from 2.1 per cent in 2012 to 1.7 per cent next year, and then edge up to 1.9 per cent in 2014.

"Economic prospects are very uncertain and highly dependent on the risks associated with the nature and timing of policy decisions related to the euro area crisis, [and] the US fiscal cliff," OECD analysts said in reference to
Washington's looming budget deadline.

They pointed to falling household and business confidence that led to a payoff of debts and said the climate was also morose because "unemployment is set to remain high or even rise further in many countries".

Emerging economies such as those in Brazil, China and India, which are not OECD members, would fare better, but were nonetheless subject to "spillover from the euro area crisis" that has undermined global trade.

"World trade will strengthen only gradually" over the next two years, the OECD estimated.

A breakdown of its forecasts put growth in the US economy, the world's biggest, at 2.2 per cent this year and 2.0 per cent in 2013, compared with the previous forecast in May of 2.4 and 2.6 per cent.

For Japan, gross domestic product (GDP) is now expected to expand by 1.6 and 0.7 per cent this year and next, down from 2.0 and 1.5 per cent, while the eurozone economy is tipped to contract by 0.4 and 0.1 per cent.

That compared with the earlier OECD eurozone estimate of a eurozone decline of 0.1 per cent this year and growth of 0.9 per cent in 2013.

Battling slowdown

Outside the OECD, growth in Brazil from 2012 to 2014 was put at 1.5, 4.0 and 4.1 per cent, in China at 7.5, 8.5 and 8.9 per cent, and in India at 4.4, 6.5 and 7.1 per cent.

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The eurozone should have the highest unemployment, with rates of 11.1 per cent and 11.9 per cent of the workforce, an increase from the earlier forecasts of 10.8 and 11.1 per cent.

To battle against the slowdown, OECD economists called for stronger fiscal stimulus, noting that China and Germany in particular should spend more to boost economic activity, as well as monetary stimulus through so-called quantitative easing.

"Lower interest rates, where possible, and much stronger additional quantitative easing would be merited in all economies," the report said.

Japanese authorities were encouraged to draft more credible medium-term budget consolidation measures however, owing to that country's huge public debt.

In the eurozone, "a complete bank union is needed for the long term; direct ESM injections into banks are necessary in the short term," the report said in reference to the European Stability Mechanism, the bloc's rescue fund.

In Brussels, a long-awaited deal on aid to Greece was reached late on Monday, with the eurozone and the International Monetary Fund unblocking $56.6bn in loans and agreeing on the need to grant significant debt relief for decades to come.

UniCredit economist Tullia Bucco said: "We think that Greece will eventually need a much larger debt relief but any agreement on this is unlikely to happen before German elections next fall."

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Source:
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