FAILURE by Europe to ease the pace of its strict austerity programme risks leading to a vicious circle that could put paid to a tentative recovery in the global economy, the Organisation for Economic Cooperation and Development said on Tuesday.
In its half-yearly update on the global economy, the Paris-based club of 34 developed nations said the 17-nation single currency area was on course to contract by 0.1 per cent this year with deep contraction in the countries of southern Europe.
“The risk is increasing of a vicious circle, involving high and rising sovereign indebtedness, weak banking systems, excessive fiscal consolidation and lower growth,” said Pier Carlo Padoan, the OECD’s chief economist.
With developing countries such as China still growing strongly, the think tank said global growth this year would be 3.4 per cent, down from 3.6 per cent in 2011, before rising to 4.2 per cent in 2013. But growth among OECD members would be held back by Europe and would ease from 1.8 per cent to 1.6 per cent in 2012 before recovering to 2.2 per cent in 2013. Of the big rich nations, the US and Japan would grow most strongly, while Britain is expected to grow by just 0.5 per cent this year, accelerating to 1.9 per cent in 2013.
“We see a slow rebound of growth in the United States driven mostly by private demand, some pickup in Japan and moderate to strong growth in emerging economies,” Padoan said.
“We also see flat growth in the euro area which hides important differences, with northern countries growing and southern countries in recession,” he added. Padoan expressed concern about a debt default in Greece and the shaky condition of Spain’s banks, but said the emergency action by the European Central Bank, including a one trillion euros liquidity injection had so far prevented the 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 contrast to the eurozone, the US 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 per cent this year and 2.6 per cent in 2013.
Japan’s two per cent growth this year would be boosted by a construction boom following the tsunami in 2011, while China would expand by 8.2 per cent in 2012 and 9.3 per cent in 2013.
The OECD predicted that the UK would recover this year from its double-dip recession over the winter. The think tank maintained its previous 0.5 per cent growth forecast for 2012 while raising its 2013 prediction a notch to 1.9 per cent.
“Fiscal consolidation is a drag on growth,” the OECD said. “However ... fiscal policy remains heavily constrained. The ambitious government plan to restore fiscal sustainability remains on track and appropriate despite disappointing economic growth.” The UK government has come under pressure to change course as austerity measures have hit demand, but the OECD said the downturn would be temporary. — The Guardian, London