By Nick Mann | 29 November 2011
The eurozone crisis is the main risk to the global economy and decisive action is needed to ensure it does not spread, the Organisation for Economic Co-operation and Development has warned.In its latest Economic outlook, the think-tank said that the eurozone economy would enter a ‘mild recession’ next year and will grow by only 0.2% in 2012, compared with the 1.6% expected for this year. It forecast that growth across OECD countries would slow from 1.9% this year to 1.6% in 2012.
The OECD said that concerns about sovereign debt sustainability were becoming increasingly widespread. If not addressed, they could ‘massively escalate’ economic disruption as they increasingly affect countries with relatively solid public finances.
OECD chief economist Pier Carlo Padoan said action needed to be taken quickly to address the crisis. ‘In the euro area, the risk of contagion needs to be stemmed through a substantial increase in the capacity of the European Financial Stability Fund, together with a greater ability to call on the European Central Bank’s balance sheet,’ he said.
‘Much greater firepower must be accompanied by governance reforms to offset the risk of moral hazard.’
The OECD also forecast recession in the UK, with the economy shrinking by 0.03% in the final quarter of 2011 and by 0.15% in the first three months of 2012. It said a combination of weak international demand, continued low levels of household spending and the government’s efforts to cut the deficit had ‘halted the recovery’ in the UK.
But it was more positive about the UK’s long-term growth prospects, with the 0.5% increase in gross domestic product forecast for 2012 as a whole expected to be followed by 1.8% growth in 2013. The OECD explained this would come as a result of a recovery in exports and household consumption.
It praised the government’s ‘ambitious fiscal consolidation’, which, it said, had ‘bolstered credibility and helped maintain low bond yields’. This would help to ‘cushion the slowdown’, it added.
