The Organization for Economic Cooperation and Development cutits growth forecasts, warned of the risk of a “major” globalrecession and urged the European Central Bank and the People's Bankof China to ease monetary policy.

“After five years of crisis, the global economy is weakeningagain,” OECD Chief Economist Pier Carlo Padoan said today in theorganization's semi-annual Economic Outlook. “The risk of a majorcontraction cannot be ruled out.”

U.S. gross domestic product will rise 2.2 percent this year and2 percent next, down from predictions of 2.4 percent and 2.6percent in May, according to the report. The euro area will shrink0.4 percent and 0.1 percent in those years, compared with a 0.1percent 2012 contraction and 0.9 percent 2013 growth expected inMay.

The Paris-based OECD, which advises its 34 member governments oneconomic policy, highlighted the risks posed to global growth at atime when U.S. lawmakers are trying to avoid the so-called fiscalcliff of about $607 billion in automatic tax increases and spendingcuts and euro nations are saddled with a recession and a debtcrisis that is now in its fourth year.

The OECD also warned of the situation in the euro area, wherefinance ministers early this morning eased the terms on emergencyaid for Greece, declaring after three years of false starts thatEurope has found the formula for nursing the debt- stricken countryback to health.

The Stoxx Europe 600 Index gained 0.4 percent at 10:28 a.m. inLondon, after climbing as much as 0.7 percent to the highest sinceNov. 7. The euro touched a three-week high against the dollar,advancing to $1.3009, the strongest since Oct. 31, before falling0.2 percent to $1.2950.

“If the fiscal cliff is not avoided, a large negative shockcould bring the U.S. and the global economy into recession,” Padoansaid. “In the euro area, where the greatest threats to the worldeconomy remain,” governments have made progress, though problems ofdebt sustainability in some countries “risk sparking a chain ofevents” that could push the global economy into recession, hesaid.

Easing Required

The 34-member OECD countries combined will grow 1.4 percent thisyear and next, less than the 1.6 percent and 2.2 percent predictedin June. The group will grow 2.3 percent in 2014, with expansionsof 2.8 percent in the U.S. and 1.3 percent in the euro region, theOECD said in its first forecast for that year.

Achieving that longer-term forecast depends on heading off aglobal recession now, according to the report.

“Additional easing is required in the euro area, Japan and someemerging market economies, including China and India,” Padoan said.“If serious downside risks were to materialize, further policysupport would be essential,” including additional quantitativeeasing and temporary fiscal stimulus by countries “with robustfiscal positions, including Germany and China,” the OECD said.

In Japan, where the OECD expects growth of 1.6 percent this yearand 0.7 percent next, policy makers need to set out “a moredetailed and credible medium-term fiscal consolidation program” toreassure investors about the sustainability of its debt.

U.K. GDP meanwhile will fall 0.1 percent this year and grow 0.9percent in 2013, the OECD predicts. “The Bank of England isproviding significant support to the economy through quantitativeeasing, which should continue,” the OECD said. “With the fiscaldeficit and public debt still high, the policy of fiscalconsolidation remains appropriate.”

Among major euro-area economies, Germany is expected to grow 0.9percent this year and 0.6 percent next, while France will expand0.2 percent and 0.3 percent.

“France must seize the opportunity of the initial phase of a newgovernment mandate to launch a comprehensive medium-term strategyof fiscal consolidation, spending cuts and structural reforms toboost confidence and raise competitiveness and growth,” the OECDsaid picking up a theme set out in recent weeks by theInternational Monetary Fund and the European Commission.

Italy, Spain

Similarly, Italy needs to uphold Prime Minister Mario Monti'spledge to shore up public finances and overhaul the country'seconomy to prompt a return to growth and enjoy investor confidenceafter next year's elections, the OECD said. Italian GDP is set toshrink 2.2 percent this year and 1 percent next year, according tothe report.

The OECD advised Spain, where a recession is intensifying, toproceed “briskly” with bank restructuring. The Spanish economy willshrink 1.3 percent and 1.4 percent in 2012 and 2013, the reportsaid.

Across the euro area, banks need about 400 billion euros ($520billion) of fresh capital, the OECD estimates. Governments alsoneed to press ahead with their plans for banking union or riskincreasing concern about the sustainability of the euro region, itsaid.

Europe's woes contrast with the situation of the big emergingmarkets, even if growth has slowed around the world this year.China's economy is set to expand 7.5 percent this year and 8.5percent next, while India's will grow 4.4 percent in 2012 and 6.5percent in 2013. Brazil will register an expansion of 1.5 percentthis year before accelerating to 4 percent next year.

“The global nature of the current slowdown reminds us, onceagain, of the need to take interdependence and channels oftransmission into serious consideration,” Padoan said.

Bloomberg News

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