Economic forecast: Slow, rough

Do something quick, alliance chief tells global players

Hospital workers from the Clinico San Carlos in Madrid block traffic outside the hospital Tuesday in a protest against cuts to Spain’s national heath service. The Organization for Economic Cooperation and Development said the Spanish economy will shrink 1.4 percent in 2013.
Hospital workers from the Clinico San Carlos in Madrid block traffic outside the hospital Tuesday in a protest against cuts to Spain’s national heath service. The Organization for Economic Cooperation and Development said the Spanish economy will shrink 1.4 percent in 2013.

— The global economy could easily slide back into recession if its major problems — such as U.S. budget standoffs and Europe’s lack of jobs — are left to fester, a leading international economic body said Tuesday.

In its half-yearly update, the Organization for Economic Cooperation and Development warned that the recovery will be “hesitant and uneven” over the next two years and that a new major contraction cannot be ruled out.

“The world economy is far from being out of the woods,” said Angel Gurria secretary-general of the organization. “Governments must act decisively, using all the tools at their disposal to turn confidence around and boost growth and jobs in the United States, Europe and elsewhere.”

Gurria’s downbeat assessment came as the organization published a fairly glum set of predictions. Though the world economy is expected to grow by 3.4 percent next year, up from 2.9 percent this year, the numbers mask big divergences around the world.

Though countries such as China, Brazil and India are expected to see growth pick up, the more established economies that the Parisbased organization tradition- ally monitors remain stuck in a rut.

In particular, the report was gloomier about Europe than in the last forecast six months ago, saying “the greatest threats to the world economy” lie in the 17-country eurozone, which continues to grapple with a debt crisis after three years. A deep global recession is also possible, it said, if the European crisis doesn’t stabilize.

“After five years of crisis, the global economy is weakening again,” said the organization’s Chief Economist Pier Carlo Padoan. “The risk of a major contraction cannot be ruled out.”

The downbeat report came despite recent indications that the crisis in the eurozone is ebbing. Earlier Greece’s euro partners and the International Monetary Fund agreed to hand over more bailout cash to the country, a move that’s eliminated fears of an imminent bankruptcy.

The organization is now predicting a 0.4 percent contraction this year for the eurozone, worse than May’s 0.1 percent forecast. For next year, it’s forecasting a further 0.1 percent fall, in contrast to the previous prediction of 0.9 percent growth.

It also downgraded its forecasts for the U.S. economy and warned that it could be worse if the White House doesn’t clinch a deal with lawmakers on the budget. Assuming a deal is reached, the report said growth will be 2 percent for the U.S. next year, down from a forecast of 2.6 percent in May.

The report cautioned that growth outside the organization — made up of 34 developed economies mostly in North America and Europe — would be slightly faster but crimped by Europe’s troubles.

“A slowdown has surfaced in many emerging market economies, partly reflecting the impact of the recession in Europe,” Padoan said.

The Organization for Economic Cooperation and Development also warned the U.S. and Europe against cutting spending too sharply and too quickly, saying that could further hurt growth prospects. It suggested that countries with stronger economies such as Germany and China could provide temporary fiscal stimulus to help growth.

Padoan expressed concern about the so-called fiscal cliff in the U.S., automatic tax increases and steep spending cuts that take effect in January unless President Barack Obama and Congress reach a budget agreement.

“If the fiscal cliff is not avoided, a large negative shock could bring the U.S. and the global economy into recession,” Padoan said.

The report argues for “measured” spending cuts and tax increases.

Information for this article was contributed by Mark Deen of Bloomberg News.

Business, Pages 25 on 11/28/2012

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