OECD moots compact growth approach for global recovery

Reno News.Net Tuesday 22nd May, 2012

PARIS - The Organization for Economic Cooperation and Development(OECD) Tuesday called on governments and Europe's central bank to act quickly to help maintain the slow but uneven economic recovery across regions and not let the euro area crisis derail global growth.

In its latest Economic Outlook report, the Paris based OECD warns that failure to act today could lead to a worsening of the European crisis and spillovers beyond the euro area, with serious consequences for the global economy. Avoiding such a scenario requires action to be taken both at country and supranational level.

"The crisis in the euro zone remains the single biggest downside risk facing the global outlook," said OECD Chief Economist Pier Carlo Padoan.

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 said.

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.

The report forecasts Europe falling further behind other countries, particularly the United States, whose economy is expected to grow 2.4 per cent this year and 2.6 per cent in 2013..

"There is now a diverging trend between the euro area and the U.S., where the U.S. is picking up more strongly while the euro area is lagging behind," Padoan said.

Echoing French President Francois Hollande's stance, Padoan has called on eurozone leaders to adopt a "growth compact" to boost growth even while reducing deficits.

Reiterating his call of six months ago for the ECB to do more to stem Europe's crisis, Padoan has mooted that eurobonds - debt issued jointly by countries in the currency bloc - could be used to recapitalize banks.

The ECB should also consider renewing the "unconventional measures" it used last year such as buying up government bonds, "if there is need to cope with contagion problems," Padoan said.

Business and household confidence remains weak in Europe, while 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 euro crisis, the report states.

Padoan said the eurozone economy could contract as much as 2 per cent this year, a projection the think tank had given as the worst-case scenario in November.

The think tank stresses that while activity remains strong in most emerging-market economies, the policy challenges vary, with inflation acting as a drag on real incomes in some, though it remains subdued in others.

Lower inflation provides policy space in some countries that could be used to sustain activity, it moots.

In the case of the 17-country eurozone, Padoan said its average forecast was the economy in the region could shrink 0.1 per cent this year and grow a mere 0.9 per cent in 2013.

"Today we see the situation in the euro area close to the possible downside scenario" in the OECD's November report, "which if materializing could lead to a severe recession in the euro area and with spillovers in the rest of the world," Padoan told media.

Europe is increasingly split between a wealthier north continuing to grow and a southern rim that is sliding deeper into recession, the OECD data shows.

Germany, Europe's largest economy, is expected to record 1.2 per cent growth this year and further accelerate to 2 per cent next year, while France is projected to expand 0.6 per cent and 1.2 per cent respectively.

Italy's economy, by contrast, is forecast to grow 1.7 per cent this year but dip to 0.4 per cent in 2013, the OECD forecast. Spain is also set to remain mired in recession, with contraction of 1.6 per cent this year and 0.8 per cent next.

Asian economies are also expected to do better than Europe, the OECD predicted.

Japan is forecast to grow 2 per cent this year and slow down to 1.5 per cent in 2013, while China is expected to accelerate from 8.2 per cent to 9.3 per cent.