Global economy is set for sharp slowdown in 2013–OECD

PARIS – 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 OECD warned on Tuesday.

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

The organization slashed its outlook for the 34-member OECD area, which includes most of the world’s industrialized economies, in 2013 to 1.4 percent from a previously expected level of 2.2 percent.

On a global level, the OECD cut the 2012 growth forecast to 2.9 percent from 3.4 percent, and its estimate for 2013 to 3.4 percent from 4.2 percent.

Another threat to business activity worldwide is a potentially catastrophic budget standoff in the United States, where automatic tax increases and spending cuts are to take effect in January unless Democrat and Republican lawmakers 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.

The Organization for Economic Cooperation and Development downgraded its growth estimates for this year and next for the United States 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.

Overall the 34-member organisation’s economies are expected to expand by 1.4 percent in 2012 and 2013, and then pick up to a pace of 2.3 percent in 2014.

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

Inflation should decline meanwhile, from 2.1 percent in 2012, to 1.7 percent next year, and then edge up to 1.9 percent 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 percent this year and 2.0 percent in 2013, compared with the previous forecast in May of 2.4 and 2.6 percent.

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

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

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

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

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

“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 43.7 billion euros in loans and agreeing on the need to grant significant debt relief for decades to come.

Greece must still meet a series of agreed conditions but “the decision will certainly reduce the uncertainty and strengthen confidence in Europe and in Greece,” European Central Bank President Mario Draghi said.

The OECD outlook emphasised a need for eurozone structural reforms to “boost growth by removing obstacles to investment and efficiency in service sectors.”