Global growth is set for a sharp slowdown next year and the Euro zone debt crisis “remains the greatest threat to the world economy at present,” the OECD warned on Tuesday. In its latest Economic Outlook the OECD also cautioned that “the risk of a new major contraction cannot be ruled out” after a global slump in 2009.
The organisation slashed its outlook for the 34-member OECD area, which includes most of the world's industrialised economies, in 2013 to 1.4% from a previously expected level of 2.2%.
On a global level, the OECD cut the 2012 growth forecast to 2.9% from 3.4%, and its estimate for 2013 to 3.4% from 4.2%, on fears that the Euro crisis could undermine world trade and the emerging economies of Brazil, China and India.
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.
OECD also downgraded its growth estimates for this year and next for the United States and Japan, and its data showed that the Euro zone 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.
OECD economies are expected to expand by 1.4% in 2012 and 2013, and then pick up to a pace of 2.3% in 2014. Unemployment is forecast to rise from 8% this year to 8.2% in 2013 before easing back to 8.0% in 2014.
Inflation should decline from 2.1% in 2012 to 1.7% next year, and then edge up to 1.9% in 2014.
Emerging economies such as those in Brazil, China and India, which are not OECD members, would fare better, but were nonetheless subject to spill-over 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 at 2.2% this year and 2% in 2013, compared with the previous forecast in May of 2.4% and 2.6%.
Japan’s GDP is expected to expand by 1.6% and 0.7% this year and next, down from 2% and 1.5%, while the Euro zone economy is tipped to contract by 0.4% and 0.1%.
That compared with the earlier OECD Euro zone estimate of a Euro zone decline of 0.1% this year and growth of 0.9% in 2013.
Outside the OECD, growth in Brazil from 2012 to 2014 was put at 1.5%, 4% and 4.1%; China at 7.5, 8.5 and 8.9% and India at 4.4, 6.5 and 7.1%.
The Euro zone should have the highest unemployment, with rates of 11.1% and 11.9% of the workforce, an increase from the earlier forecasts of 10.8 and 11.1%.
To battle against the slowdown, OECD economists called for stronger fiscal stimulus, noting that China and Germany in particular should spend more to boost economic activity, as well as monetary stimulus through so-called quantitative easing.