OECD Secretary General Angel Gurria. (Bloomberg)
PARIS (AFP) ― The world’s top economies are slowing with the eurozone set to shrink briefly, and rapid action by EU leaders to enact promised rescue measures is key to global recovery, the OECD said on Monday.
Days before a summit of G20 leading nations in Cannes, southern France, amid a threat of recession in some countries, the OECD called on leaders to act fast and hard to keep promises and also to boost growth.
It also pressed the European Central Bank to ease its base interest rate.
“Much of the current weakness is due to a generalized loss of confidence in the ability of policymakers to put in place appropriate responses,” OECD chief Angel Gurria said in a pre-summit statement.
“It is therefore imperative to act decisively to restore confidence and to implement appropriate policies to restore longer-term fiscal sustainability ...” he added.
G20 leaders are to adopt at the two-day summit beginning on Thursday action an plan to boost growth, following up on their successful work to prevent the 2007 financial crisis from plunging the global economy into a depression.
“Today, the adoption and implementation of the Action Plan is just as imperative to restore confidence through decisive actions in specific countries and regions,” said Gurria.
The Organization for Economic Cooperation and Development lowered its forecast for U.S. growth to 1.7 percent this year from 2.6 percent, and to 1.8 percent from 3.1 percent for 2012.
For the eurozone it now expects 1.6 percent growth this year instead of the 2.0 percent it forecast in May.
For next year it now sees 0.3-percent growth instead of 2.0 percent, 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-percent contraction this year followed by 2.1-percent growth in 2012, while China is set for 9.3-percent growth in 2011 and 8.6 percent next year.
But a prompt and forceful implementation of measures announced last week to turn back the euro area crisis could lead to “a better upside scenario” of growth, said the OECD.
“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,” Gurria said.
European shares fell and the euro slid against the dollar on Monday as investors weighed rising Italian borrowing rates despite the eurozone rescue measures, traders said.
The OECD urged more detailed information on the eurozone measures, which include private investors taking a 50-percent cut in the value of their holdings of Greek bonds, a recapitalization of banks, and a boost to the eurozone bailout fund.
“To resolve the euro area crisis, it is important to clarify and implement fully and decisively the measures announced on 26 October to break the link between sovereign debt and banking distress, to deal with Greece, to ensure that the sovereign debt crisis does not spread to other European countries ...” Gurria said.
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,” Gurria said.
“Further monetary relaxation, including through unconventional measures, would be warranted if downside risks intensify,” he added.
The Bank of England decided last month to inject more money into the economy while keeping rates steady, but so far the U.S. Federal Reserve and the European Central Bank have yet to take moves.
The ECB, which raised its key rate to 1.5 percent 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,” it said.
Countries with stronger public finances should implement short-term measures to boost growth.
However, a failure by the eurozone to contain its debt crisis or a too sharp budget retrenchment in the United States could lead to a even “gloomier” growth scenario, the OECD warned.
A deterioration in financial conditions similar to the 2007-2009 global crisis could lead to a five percent drop in the economies in some countries according to the OECD’s analyses.