The Paris-based OECD says in its latest Economic Outlook that continued failure by EU leaders to stem the debt crisis that has spread from Greece to much-bigger Italy “could massively escalate economic disruption” and end in “highly devastating outcomes.”
The bi-annual report recommends urgently boosting the EU bailout fund and calls on Europe’s central bank to do more to stem the crisis.
Decisive policies must be urgently put in place to stop the euro area sovereign debt crisis from spreading and to put weakening global activity back on track, says the OECD’s outlook.
The euro area crisis remains the key risk to the world economy, the outlook says.
Concerns about sovereign debt sustainability are becoming increasingly widespread. If not addressed, recent contagion to countries thought to have relatively solid public finances could massively escalate economic disruption.
Pressures on bank funding and balance sheets increase the risk of a credit crunch.
Another serious downside risk is that no action would be agreed to offset the large degree of fiscal tightening implied by current law in the US. This could tip the economy into a recession that monetary policy could do little to counter.
“Prospects only improve if decisive action is taken quickly,” said OECD Chief Economist Pier Carlo Padoan.
“In the euro area, the risk of contagion needs to be stemmed through a substantial increase in the capacity of the European Financial Stability Fund, together with a greater ability to call on the European Central Bank’s balance sheet. Much greater firepower must be accompanied by governance reforms to offset the risk of moral hazard,” he said.
Improved prospects would also depend on the enactment of a credible medium-term fiscal program in the US.
The outlook’s baseline scenario assumes that policy-makers take sufficient action to avoid disorderly sovereign defaults, a sharp credit contraction, systemic bank failures and excessive fiscal tightening.
It sees GDP across the OECD countries slowing from 1.9 percent this year to 1.6 percent in 2012, before recovering to 2.3 percent in 2013. Unemployment in the OECD area is also projected to remain high for an extended period, with the jobless rate staying at around 8 percent through the next two years.
“We are concerned that policy-makers fail to see the urgency of taking decisive action to tackle the real and growing risks to the global economy,” Padoan said during the launch of the report in Paris.
“We see the US growth recovering only slowly, the euro area entering into mild recession and Japan growing faster because of reconstruction, but this boost is temporary and will fade away.”
US GDP is projected to rise by 2.0 percent in 2012 and by a further 2.5 percent in 2013, after an expected expansion of 1.7 percent this year.
Euro area growth is forecast to slow down from 1.6 percent this year to 0.2 percent next year, before picking up to 1.4 percent in 2013.
In Japan, GDP is expected to expand by 2 percent in 2012 and 1.6 percent in 2013, following a contraction of 0.3 percent in 2011, which reflects the impact of the earthquake and tsunami and subsequent reconstruction activity.
Chinese economic growth is seen easing to 8.5 percent in 2012, from 9.3 percent this year, before climbing back to 9.5 percent in 2013. Weaker activity in China and other emerging-market economies together with modest falls in commodity prices should put inflation in these countries on a downward trend, allowing some easing of monetary policy.
The outlook’s baseline scenario assumes that policy-makers take sufficient action to avoid disorderly sovereign defaults, a sharp credit contraction, systemic bank failures and excessive fiscal tightening.
It sees GDP across the OECD countries slowing from 1.9 percent this year to 1.6 percent in 2012, before recovering to 2.3 percent in 2013. Unemployment in the OECD area is also projected to remain high for an extended period, with the jobless rate staying at around 8 percent through the next two years.
“We are concerned that policy-makers fail to see the urgency of taking decisive action to tackle the real and growing risks to the global economy,” Padoan said during the launch of the report in Paris.
“We see the US growth recovering only slowly, the euro area entering into mild recession and Japan growing faster because of reconstruction, but this boost is temporary and will fade away.”
US GDP is projected to rise by 2.0 percent in 2012 and by a further 2.5 percent in 2013, after an expected expansion of 1.7 percent this year.
Euro area growth is forecast to slow down from 1.6 percent this year to 0.2 percent next year, before picking up to 1.4 percent in 2013. In Japan, GDP is expected to expand by 2 percent in 2012 and 1.6 percent in 2013, following a contraction of 0.3 percent in 2011, which reflects the impact of the earthquake and tsunami and subsequent reconstruction activity.
Chinese economic growth is seen easing to 8.5 percent in 2012, from 9.3 percent this year, before climbing back to 9.5 percent in 2013.
Weaker activity in China and other emerging-market economies together with modest falls in commodity prices should put inflation in these countries on a downward trend, allowing some easing of monetary policy.
Under the baseline scenario, weak activity, low levels of inflation and predominantly downside risks should trigger strongly accommodative monetary policy in OECD countries.
Central banks should provide ample liquidity to calm tensions in financial markets and prepare contingency plans that could be implemented swiftly if needed.
On the contrary, a continued lack of effective action could trigger an alternative, downside scenario where the outlook becomes much bleaker.
This scenario could be prompted by a worsening of existing concerns about the banking system, contagion in euro-area sovereign debt markets or an excessively tight fiscal policy in the US linked to the current political gridlock.
In the Strategic Response section of its Outlook, the OECD identifies country-specific policies that should be implemented if the macroeconomic situation derails: the financial sector must be stabilized, the social safety net protected and monetary policy eased further. Where feasible, governments should provide fiscal support while strengthening fiscal frameworks to reassure markets that public finances can be brought under control.
Under this scenario, a wide range of structural measures to boost jobs and economic activity, all desirable in their own right, will become urgent.
Effective labor market policies are needed to tackle unemployment which risks turning from cyclical to structural, thereby sapping potential growth, hitting confidence and weakening public finances.
