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

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

U.S. gross domestic product will rise 2.2 percent this year and 2 percent next, down from predictions of 2.4 percent and 2.6 percent in May, according to the report. The euro area will shrink 0.4 percent and 0.1 percent in those years, compared with a 0.1 percent 2012 contraction and 0.9 percent 2013 growth expected in May.

The Paris-based OECD, which advises its 34 member governments on economic policy, highlighted the risks posed to global growth at a time when U.S. lawmakers are trying to avoid the so-called fiscal cliff of about $607 billion in automatic tax increases and spending cuts and euro nations are saddled with a recession and a debt crisis that is now in its fourth year.

The OECD also warned of the situation in the euro area, where finance ministers early this morning eased the terms on emergency aid for Greece, declaring after three years of false starts that Europe has found the formula for nursing the debt- stricken country back to health.

The Stoxx Europe 600 Index gained 0.4 percent at 10:28 a.m. in London, after climbing as much as 0.7 percent to the highest since Nov. 7. The euro touched a three-week high against the dollar, advancing to $1.3009, the strongest since Oct. 31, before falling 0.2 percent to $1.2950.

“If the fiscal cliff is not avoided, a large negative shock could bring the U.S. and the global economy into recession,” Padoan said. “In the euro area, where the greatest threats to the world economy remain,” governments have made progress, though problems of debt sustainability in some countries “risk sparking a chain of events” that could push the global economy into recession, he said.

Easing Required

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

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

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

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

U.K. GDP meanwhile will fall 0.1 percent this year and grow 0.9 percent in 2013, the OECD predicts. “The Bank of England is providing significant support to the economy through quantitative easing, which should continue,” the OECD said. “With the fiscal deficit and public debt still high, the policy of fiscal consolidation remains appropriate.”

Among major euro-area economies, Germany is expected to grow 0.9 percent this year and 0.6 percent next, while France will expand 0.2 percent and 0.3 percent.

“France must seize the opportunity of the initial phase of a new government mandate to launch a comprehensive medium-term strategy of fiscal consolidation, spending cuts and structural reforms to boost confidence and raise competitiveness and growth,” the OECD said picking up a theme set out in recent weeks by the International Monetary Fund and the European Commission.

Italy, Spain

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

The OECD advised Spain, where a recession is intensifying, to proceed “briskly” with bank restructuring. The Spanish economy will shrink 1.3 percent and 1.4 percent in 2012 and 2013, the report said.

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

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

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

Bloomberg News

Instant Insights /

OECD Cuts Global Growth Forecasts

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