Trouble ahead
Trouble ahead (Reuters)

The OECD has lowered its growth forecast for the global economy and expects the eurozone to sink deeper into recession next year unless the region's leaders moderate their plans for deep government spending cuts.

The Paris-based Organisation for Economic Cooperation and Development said it expected the global economy to grow at a pace of 3.4 percent next year, down from its earlier assessment of a 4.2 percent advance. The eurozone, the OECD said in its Economic Outlook, is  likely to drift into a full-year recession and contract by around 0.1 percent.

"The world economy is far from being out of the woods," OECD secretary-general Angel Gurría said.

"The US 'fiscal cliff', if it materialises, could tip an already weak economy into recession, while failure to solve the euro area crisis could lead to a major financial shock and global downturn.

"Governments must act decisively, using all the tools at their disposal to turn confidence around and boost growth and jobs, in the United States, in Europe, and elsewhere."

Britain's economy, the group said, will likely shrink this year by around 0.1 percent and grow only modestly in 2013. The slippage this year, however, will be less than the OECD had first anticipated but the advance next year will be a more modest - 0.9 percent - than the group had forecast in May.

The OECD also seemed to hint at what many expect will be the key revelation in Chancellor George Osborne's impending budget statement - the scrapping of one of his principal debt reduction targets.

"With the fiscal deficit and public debt still high, the policy of fiscal consolidation remains appropriate to ensure the sustainability of the public finances", the report said. "In the event of lower than expected growth, the flexibility of the fiscal mandate should be utilised to allow the automatic stabilisers to continue to operate, even though this may imply pushing out the debt target."

The group expects the United States, the world's biggest economy, to grow at a 2.2 percent clip next year - an increase of around 0.4 percent from its previous forecast - even as it warned that the impending "fiscal cliff" could damage investment. The OECD encouraged a "gradual" implementation of the planned $600bn in spending cuts and tax increases that are set to kick-in next year if US lawmakers fail to reach an agreement before Christmas.

China's growth will slow to around 8.5 percent next year before advancing the following year, but the group was bullish on emerging market strength across the board, suggesting that "with increasingly supportive monetary and fiscal policies offsetting the drag exerted by weak external demand ... GDP is also expected to gather steam in the coming years in Brazil, India, Indonesia, Russia and South Africa."

In Europe, the OECD slashed growth forecasts in Germany and France and called on the European Central Bank to lower its key lending rate a further 0.25 percent to offset the impact of deep government spending cuts.   

"More needs to be done to tackle negative links in the euro area between public finances, bank solvency and risks that any country may have to leave the euro," the report said. "In the long run, this requires a fully-fledged banking union with fiscal backstops. In the near term, recapitalisation of banks should be undertaken where necessary."

"On-going fiscal consolidation will hold back activity, but private demand will pick up as confidence and the functioning of the financial sector improve. Continued high unemployment and a large margin of excess capacity will depress inflationary pressures. The main risk is a lack of sufficient progress by policy makers in resolving the crisis."

This article was updated November 30, -0001 00:00 AM
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