The OECD slashed its global growth forecasts yesterday, warning that the debt crisis in the recession-hit eurozone is the greatest threat to the world economy.

In light of the dire economic outlook, the Organisation for Economic Cooperation and Development urged Central Banks to prepare for more exceptional monetary easing if politicians fail to come up with credible answers to the debt crisis.

The Paris-based think-tank forecast in its twice-yearly Economic Outlook that the global economy would grow 2.9 per cent this year before expanding 3.4 per cent in 2013. The estimate marked a sharp downgrade since the OECD last estimated a rate in May of 3.4 per cent for this year and 4.2 per cent in 2013.

The eurozone is facing two years of economic contraction, while the US risks a recession if lawmakers there fail to agree a deal to avoid a combination of tax hikes and budget cuts that will otherwise go into effect next year.

Providing the deadlock in Washington is overcome, the world’s biggest economy will grow two per cent next year, the OECD estimated, cutting its forecast from 2.6 per cent in May.

“The US fiscal cliff is a very important source of concern, but the greatest downside risk remains the eurozone,” OECD chief economist Pier Carlo Pado said in an interview.

“The reason for that is not only recession, but also the fact that different negative policy (feedback) loops between sovereign debt, the banking situation and exit risks remain. So the overall zone remains in a state of fragility.”

Cutting its estimates, the OECD forecast that the eurozone economy would contract 0.4 per cent this year and another 0.1 per cent next year, only returning to growth in 2014 with a rate of 1.3 per cent.

The OECD warned that diverging financing conditions within the European monetary union threaten to pull it apart if policymakers fail to get a grip on the debt crisis.

“The euro area, which is witnessing significant fragmentation pressures, could be in danger,” Padoan wrote in a foreword to the outlook, urging politicians to overcome deadlock over a single European Central Bank-led bank supervisor.