Growth slowing, eurozone action key to recovery – OECD

Top economies are slowing with the eurozone set to shrink briefly and rapid action by European leaders to enact promised crisis measures is key to a global recovery, the OECD said yesterday.

The eurozone should also cut interest rates and countries with stronger public finances undertake short-term measures to boost growth, the Organisation for Economic Cooperation and Development said.

Days before the G20 group of advanced economies meet for a summit in the French city of Cannes, the OECD called on leaders to take swift action to restore confidence in the markets.

“Much of the current weakness is due to a generalised loss of confidence in the ability of policymakers to put in place appropriate responses,” the OECD said in a statement.

“It is therefore imperative to act decisively to restore confidence and to implement appropriate policies to restore longer-term fiscal sustainability,” it added. The OECD lowered its forecast for US growth to 1.7 per cent this year from 2.6 per cent, and to 1.8 per cent from 3.1 per cent for 2012. For the eurozone it now expects 1.6 per cent growth this year instead of the two per cent it forecast in May.

For next year it now sees 0.3 per cent growth instead of two per cent, warning that “patches of mild negative growth is likely in the euro area”, indicating that some countries may see short-term contractions.

Japan is set for a 0.5 per cent contraction this year followed by 2.1 per cent growth in 2012, while China is set for 9.3 per cent growth in 2011 and 8.6 per cent next year.

But the OECD said a prompt and forceful implementation of measures announced last week to stem the euro area crisis could lead to “a better upside scenario” of growth.

“These measures go in the right direction and could help restore confidence and create positive feed-back effects that could trigger a scenario of stronger growth,” said the OECD.

It urged more detailed information on the measures, which include private investors taking a 50 per cent hit on their holdings of Greek bonds, a recapitalisation of banks, and a boost to the eurozone bailout fund.

Interest rates should also be reduced where possible to further boost growth.

“In the advanced G20 economies, interest rates should remain on hold or, where possible, be reduced, notably in the euro area,” said the OECD.

“Further monetary relaxation, including through unconventional measures, would be warranted if downside risks intensify,” it added.

The Bank of England decided last month to inject more money into the economy while keeping rates steady, but so far the US Federal Reserve and the European Central Bank have yet to take moves. The ECB, which raised its key rate to 1.5 per cent earlier this year, is to hold its first policy meeting on Thursday under the leadership of Italian Mario Draghi. While nations need to move on fiscal consolidation, the OECD urged they do so in the medium term in order to not cut off growth. “Given the downward risks to growth, it is important to anchor expectations about medium- and long-term fiscal discipline in a manner that allows for a temporary easing of the fiscal stance to buffer unexpected weakness,” said the OECD.