Improving US, rebounding Japan can't stop OECD cutting world growth forecast

The global economy is slowly regaining its strength, driven largely by the rebound of the US and Japan, but record-high unemployment in Europe continues to drag on efforts to recover in that region, the Organisation for Economic Cooperation and Development (OECD) said on Wednesday.

In its twice-yearly Economic Outlook, the OECD forecast the world economy would grow 3.1 per cent this year before accelerating to 4 per cent in 2014.

The estimates marked a slightly more pessimistic view after in November the Paris-based think tank forecast global growth of 3.4 per cent this year and 4.2 per cent next year.

The organisation, based in Paris, predicted that gross domestic product in its 34 member countries, all of which have developed economies, would grow 1.2 per cent this year, slightly below the 1.4 per cent it forecast six months ago.

The US was seen driving global growth with the world's biggest economy projected to expand 1.9 per cent this year and then accelerating to 2.8 per cent in 2014, which would be the country's best rate since 2005.

In contrast, the Euro zone was estimated to remain in recession for a second year. The OECD sees its economy contracting 0.6 per cent in 2013 and then returning to growth next year with a rate of 1.1 per cent.

Unemployment, especially in Europe, remains a persistent problem contributing to the uneven pace of growth globally, the organisation said. It warned European countries that failing to address the issue would undermine the progress made from the fiscal and structural adjustments that many countries have pushed through in recent years.

"Protracted weakness could evolve into stagnation with negative implications for the global economy," said Pier Carlo Padoan, the deputy secretary general of the OECD. "Reform fatigue is mounting as visible results in growth and jobs fail to materialise."

Nevertheless, he pointed to "important progress in the Euro zone," where the economic policy changes pushed through in the past three years have begun to take hold. But countries need to maintain those policies and find new ways to persuade the public of the need to see through the changes, the organisation said.

Eckhard Wurzel, an economist within the organisation who is responsible for Europe and the Euro zone, predicted that a real turnaround in Europe could be seen by 2015. For that to happen, he said, the 17 countries using the common currency need to maintain their pace at overhauling the weaker economies, and European Union-level policies, including implementing a banking union, needed to be strengthened.

"We are on the edge of stabilising the sovereign debt," Wurzel said.

Reflecting this, the organisation forecast that the Euro-area economy would shrink 0.6 per cent this year before expanding 1.1 per cent in 2014.

However, the outlook diverged widely within the 17-nation bloc with regional powerhouse Germany seen achieving growth of 0.4 per cent and rebounding to a rate of 1.9 per cent in 2014.

Central bank stimulus
Lifting its estimate for Japan, the OECD said that the central bank's pledge to ramp up its monetary stimulus aggressively would help its economy grow 1.6 per cent this year.

The OECD took a more pessimistic view on China, forecasting that its economy would grow 7.8 per cent this year, down from a previous estimate of 8.5 per cent.

With economies in most countries still in recovery mode, the OECD said central banks should keep monetary policies easy while the European Central Bank should even dramatically step up its efforts to get credit flowing to the economy.

The OECD called on the ECB to make banks pay for holding deposits with it and urged it to buy assets such as securitised loans from credit-starved small and medium-sized firms, two options ECB policymakers say they are currently considering.

In the case of the US Federal Reserve, the OECD said it may soon be justified to begin curbing its purchases of government bonds and mortgage-backed securities

However, it warned that a slower pace of purchases would have to be carefully flagged to markets in order to avoid an abrupt sell-off by other investors that might cause yields to spike dangerously higher.

The OECD not only gave its blessing to the Bank of Japan's dramatic increase in monetary surplus but said further moves could be used to boost the economy.

It noted improvement in the UK's pace of fiscal consolidation in both 2013 and 2014, but repeated the concern mentioned by the International Monetary Fund last week that a Help to Buy programme might end up pushing house prices up.