OECD warns of slowing growth in G20 nations

The Organisation for Economic Co-operation and Development has unveiled its gloomy outlook on the global economy, warning that growth in developed nations is continuing to slow.

The Organisation for Economic Co-operation and Development (OECD) expects economic growth to slow in developed nations as the Eurozone debt crisis and US fiscal policy issues dominate economic development over the next two years.

Ahead of meeting of G20 nations on 3 and 4 November, the OECD expects average G20 gross domestic product (GDP) to expand by 3.8% in 2012, slightly slower than the 3.9% growth predicted for this year. However, the rate is forecasted to pick up to 4.6% in 2013.

Secretary-general of the OECD Angel Gurría said, “Several factors, including heightened perceptions of risk and financial market turbulence, are expected to weigh on the outlook for G20 economies.”

“Business and consumer confidence have weakened, investment decisions are being postponed on the back of greater uncertainty, and household spending has come under pressure from lower equity prices, labour market slack and persistent housing market weakness,” he said.

In an ‘event-free’ scenario (assuming no comprehensive policy action to resolve current problems), the OECD expects average economic growth to remain subdued in the advanced G20 nations. In emerging-market economies, expansion is estimated to be “buoyant” but countries will also experience below-trend rates.

“A marked slowdown with patches of mild negative growth is likely in the euro area. In the absence of decisive policy action to address current problems and steer clear of possible negative events, activity is projected to gather strength only gradually, as risk aversion dissipates and confidence gradually recovers.”

However, Gurría said that growth could be better than expected if the policy measures announced at the Euro Summit on 26 October – such as the recapitalisation of the European banking sector, the increasing of the European Financial Stability Fund, and a 50% haircut on Greek debt – are implemented “promptly and forcefully”.

“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.”

The OECD gave a summary of its GDP projections for G20 nations, in which the Eurozone is expected to grow by 1.6% and 0.3% in 2011 and 2012, respectively, well under initial forecasts of 2% growth in both years. The US is estimated to expand by 1.6% and 1.8% this year and the next, down from previous expectations of 2.6% and 3.1%. While China’s GDP growth forecast was actually raised from 9% to 9.3% this year, the 2012 growth rate is expected to be 8.6%, below the initial estimate of 9.2%.

The OECD suggested that interest rates in G20 economic should remain on hold or even be reduced, especially in the Eurozone, with central banks providing “ample liquidity to ease financial market tensions”.

“Strong, credible medium-term frameworks for fiscal consolidation and durable growth are needed to restore confidence in the longer-term sustainability of the public finances and to build budgetary space to deal with short-term economic weakness.”