Euro crisis risk to global growth

The intensifying eurozone crisis poses the most serious risk to the muted recovery in the global economy, with the United States and Japan set for modest growth, the OECD said Tuesday.

But emerging economies such as China and Brazil are set for a cyclical upswing, the Organization for Economic Development and Cooperation said in its latest twice-yearly Economic Outlook report.

The OECD held its forecast for global growth this year steady at 3.4 percent, but lowered its outlook for the eurozone to a 0.1 percent contraction, urging more easing of monetary policy and euro-wide measures to boost growth.

OECD chief economist Pier Carlo Padoan warned 'the crisis in the euro area has become more serious recently, and it remains the most important source of risk to the global economy.'

The policy forum of 34 advanced economies forecasts global growth will pick up to 4.2 percent in 2013 and 0.9 percent in the 17-member eurozone, provided it contains the debt crisis.

While the eurozone gained some breathing space at the beginning of the year from the European Central Bank pumping over a trillion euros into banks, tensions have soared in recent weeks after inconclusive elections raised the spectre of a Greek exit from the euro.

There is no guarantee Greeks will elect next month parties committed to pursuing austerity policies required under its massive international bailout and key to keeping the country in the euro.

'Elections in a number of euro area countries have signalled that reform fatigue is increasing and tolerance for fiscal adjustment may be reaching a limit,' noted Padoan.

Recession, 'rising unemployment and social pain may spark political contagion and adverse market reaction' with countries outside the eurozone also at risk of being hit, he added.

The OECD forecast eurozone unemployment to rise to 10.8 percent this year and 11.1 percent next year.

'The risk is increasing of a vicious circle, involving high and rising sovereign indebtedness, weak banking systems, excessive fiscal consolidation and lower growth,' he warned.

With EU leaders meeting in Brussels Wednesday to contemplate measures to boost growth, the OECD said 'credibility and confidence would be enhanced by euro area and EU-wide measures'.

While credible medium-term plans to reduce deficits were essential, the OECD said 'the speed of consolidation should depend on country-specific circumstances'.

New French President Francois Hollande has called for a growth pact to complement the EU fiscal pact, pitting him against German Chancellor Angela Merkel who has pushed for euro nations to pursue austerity policies.

The OECD said growth in Germany was not enough to carry along the rest of the eurozone, and said higher wages in the country could boost domestic demand and contribute to a less painful readjustment for others.

It also called for further monetary easing in the eurozone as inflation is expected to slow to the ECB target of 1.9 percent next year, and warned that the central bank may need to intervene again to stabilise banks and government bond markets.

Provided there is no euro meltdown, energy prices remain stable and government's do not cut spending too fast the OECD sees a 'muted, and possibly bumpy, recovery in the OECD economies' driven by the United States and Japan.

The OECD bumped up its forecast for US economic growth this year to 2.4 percent from 2.0 percent, and sees 2.6 percent growth in 2013 provided it doesn't cut government spending too sharply and monetary policy remains loose.

US unemployment is expected to gradually drop to 8.1 percent this year and 7.6 percent in 2013.

Japan should see 2.0 percent growth this year with the OECD trimming its forecast for 2013 to 1.5 percent. Joblessness is to dip to 4.5 percent this year and 4.4 percent in 2013.

After suffering a slowdown, emerging economic giants China and Brazil are set for a cyclical upswing, said the OECD.

'As the inventory cycle turns, and fiscal and monetary policy become more expansionary, growth should pick up in the course of 2012 and stabilise at over nine percent in 2013 (in China),' it said.
It now foresees China posting 8.2 percent growth this year and 9.3 percent in 2013.

In Brazil 'there are increasing signs that the economy is gathering steam again' with growth forecast to pick up to 3.2 percent this year and 4.2 percent in 2013.

With inflation remaining relatively high in India 'growth is expected to remain subdued through much of the year,' said the OECD. After slowing to 7.0 percent last year, growth is expected to pick up to only 7.3 percent this year and 7.8 percent in 2013.

By Richard Lein, courtesy AFP.
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