OECD sees Europe slipping into a mild recession

WireUpdate:  PARIS (BNO NEWS) -- With growth in the United States recovering only slowly, the 17-country Eurozone appears to be slipping into a mild recession, the Organization for Economic Co-operation and Development (OECD) said in a grim report released on Monday.

The OECD's latest Economic Outlook indicates the global economy has deteriorated significantly since earlier this year, and concerns about sovereign debt sustainability in the European Union are becoming increasingly widespread. "Advanced economies are slowing down and the euro area appears to be in a mild recession," said Pier Carlo Padoan, Deputy Secretary-General and Chief Economist at the OECD.

The twice-yearly report issued a stark warning that the Eurozone's sovereign debt crisis should be addressed immediately before it affects countries thought to have relatively solid public finances. The OECD, which has 34 member states, said this could 'massively escalate' global economic disruption.

With the Eurozone entering a mild recession, the OECD said figures show emerging economies are still growing but their pace is slowing, the U.S. growth is recovering but only slowly and Japan is growing faster because of reconstruction following the March earthquake and tsunami. "But this boost [in Japan] is temporary and will fade away," the OECD said.

"More than usual, world economic prospects depend on events, the nature and timing of which are highly uncertain," Padoan said. "The projections presented in this Economic Outlook portray a scenario that rests on the assumptions that monetary policy remains very supportive (and, in some places, becomes more so), that sovereign debt and banking sector problems in the euro area are contained and that excessive fiscal tightening will be avoided."

Padoan said that if adequate policy action fails to have a positive effect, it could have from relatively benign to highly devastating outcomes. "A large negative event would, however, most likely send the OECD area as a whole into recession, with marked declines in activity in the United States and Japan, and prolong and deepen the recession in the euro area," he said. "Unemployment would rise still further. The emerging market economies would not be immune, with global trade volumes falling strongly, and the value of their international asset holdings being hit by weaker financial asset prices."

To stop such a worst-case scenario, Padoan said, there needs to be a 'credible commitment' by the Eurozone governments that economic contagion will be blocked and backed by clearly adequate resources. "To eliminate contagion risks, banks will have to be well capitalized," he said. "Decisive policies and the appropriate institutional responses will have to be put in place to ensure smooth financing at reasonable interest rates for sovereigns."

He added: "This calls for rapid, credible and substantial increases in the capacity of the European Financial Stability Facility (EFSF) together with, or including, greater use of the European Central Bank (ECB) balance sheet. Such forceful policy action, complemented by appropriate governance reform to offset moral hazard, could result in a significant boost to growth in the euro area and the global economy."

The report, assuming policy-makers take sufficient action, sees gross domestic product (GDP) across the OECD countries slowing from 1.9 percent this year to 1.6 percent in 2012, before recovering to 2.3 percent in 2013 as confidence starts to recover. Unemployment in the OECD area is also projected to remain high for an extended period, with the jobless rate staying at around 8 percent through the next two years.

U.S. GDP is projected to rise by 2.0 percent in 2012 and by a further 2.5 percent in 2013, after an expected expansion of 1.7 percent this year. Euro area growth is forecast to slow down from 1.6 percent this year to 0.2 percent next year, before picking up to 1.4 percent in 2013. In Japan, GDP is expected to expand by 2 percent in 2012 and 1.6 percent in 2013, following a contraction of 0.3 percent in 2011, which reflects the impact of the earthquake and tsunami and subsequent reconstruction activity.

Chinese economic growth is seen easing to 8.5 percent in 2012, from 9.3 percent this year, before climbing back to 9.5 percent in 2013. Weaker activity in China and other emerging-market economies together with modest falls in commodity prices should put inflation in these countries on a downward trend, allowing some easing of monetary policy, the OECD said.

"In view of the great uncertainty policy makers now confront, they must be prepared to face the worst," Padoan said. "The difference between the upside and the downside scenarios reflects the impact of credible, confidence building policy action. Such action, as we have seen, requires measures to be implemented at the euro area level as well as at the country level throughout the OECD, especially in the structural policy domain."