OECD sees euro crisis threatening world recovery

by **hlk** Tue 22 May 2012, 20:02

PARIS (Reuters): The United States and Japan are leading a fragile economic recovery among developed countries that could yet be blown off course if the euro zone fails to contain its flaring growth crisis, the OECD said on Tuesday.
In its twice-yearly economic outlook, the Paris-based Organisation for Economic Co-operation and Development forecast that global growth would ease to 3.4 percent this year from 3.6 percent in 2011, before accelerating to 4.2 percent in 2013, in line with its last estimates from late November.
Growth across the organisation's 34 members, generally the wealthiest in the world, would ease this year to 1.6 percent from 1.8 percent in 2011 and then reach 2.2 percent in 2013, also roughly in line with previous estimates.
"We see a slow rebound of growth in the United States driven mostly by private demand, some pick-up in Japan and moderate to strong growth in emerging economies," OECD chief economist Pier Carlo Padoan told Reuters in an interview.
"We also see flat growth in the euro area which hides important differences, with northern countries growing and southern countries in recession," he added.
The OECD forecast that the 17-member euro zone economy would shrink 0.1 percent this year before posting growth of 0.9 percent in 2013, though regional powerhouse Germany would chalk up growth of 1.2 percent in 2012 and 2.0 percent in 2013.
Although OECD economies were on the mend, the euro zone's debt crisis could still spiral out of control with Greece struggling to remain solvent and Spanish banks needing to be recapitalised, Padoan said.
The European Central Bank's injection of one trillion euros of liquidity into the euro zone's banking system and an increase in European bailout funds and IMF reserves had helped keep the euro zone's debt crisis from spiralling out of control.
"If the situation gets worse, there are ways to enhance the firewall capacity which could include a stronger intervention or role of the ECB," Padoan said.
In particular, the ECB should not rule out buying government bonds again to keep borrowing costs down, lending to the ESM European bailout fund as well as cutting its main benchmark interest rate, which currently stands at 1.00 percent. The ECB could also consider another injection of liquidity into the banking system.
U.S., CHINA ENGINES
In contrast to the euro zone, the United States was expected to continue to benefit from easy credit conditions and ultra-loose monetary policy, with the world's biggest economy forecast to grow 2.4 percent this year and 2.6 percent in 2013. In November, the OECD had forecast 2.0 percent for 2012 and 2.5 percent for 2013.
Although some budget tightening and a still weak housing market would be a drag on growth, demand in the private sector would continue to strengthen as the unemployment rate to as low as 7.5 percent by the end of 2013 from 8.1 percent in April.
The OECD said that while the U.S. needed to step up the pace of its fiscal tightening, if tax cuts were allowed to expire as scheduled in 2013 it could result in too much cutting at once and threaten growth.
The Japanese economy was set to grow 2.0 percent this year and 1.5 percent in 2013 as a reconstruction boom after last year's earthquake and tsunami faded although recovering world trade would offer support.
A rebound in global trade would be a bright spot for many economies, with the OECD forecasting it would surge from 4.1 percent this year to 7.0 percent 2013.
Export-giant China was forecast to see growth rebound from 8.2 percent this year to 9.3 percent in 2013 as interest rate cuts and increased social spending propped up domestic demand in the non-OECD member country.