OECD warns G20 to act as it slashes growth forecasts

Europe will grow by just 0.3 per cent next year and the US by 1.8 per cent, says Paris think tank
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Parts of Europe will sink into recession next year, according to the Organisation for Economic Co-operation and Development (OECD). The Paris-based economic think tank has slashed its forecasts for growth in the euro area for 2012 to just 0.3 per cent, down from a 2 per cent forecast in June. It says that the eurozone will suffer "a marked slowdown with patches of mild negative growth". The think tank also forecasts that growth in the US will slump to 1.8 per cent in 2012, having previously forecast a 3.1 per cent expansion for the world's largest economy.

The OECD further warns that unemployment is likely to remain high in advanced economies for the foreseeable future and that trade imbalances in the global economy, which fuelled the 2008 credit meltdown, will "remain broadly unchanged" over the next two years.

The downbeat report on the global economy sets a gloomy scene for this week's G20 meeting in Cannes, where world leaders will come together to discuss, among other things, proposals for Asian nations to help to stabilise the European sovereign-debt crisis. The OECD argues that much of the present lack of confidence in the global economy is due to the prevarication of politicians. It calls on G20 leaders to act together in the manner of 2008, where they successfully avoided "a second Great Depression".

It says that eurozone leaders should implement the rescue package agreed at last week's Brussels summit "promptly and forcefully", but stresses that "more detailed information" is needed, in particular over how the firepower of the European bailout fund will be maximised. It also recommends that the European Central Bank (ECB) should cut interest rates in order to support flagging growth across the Continent. The new head of the ECB, Mario Draghi, who replaces Jean-Claude Trichet today, will give his first official press conference on Thursday. The think tank further argues that the US should slow its pace of spending cuts and tax rises "to avoid tipping the economy into recession".

The OECD's sobering message was reinforced by a report by the International Labour Organisation (ILO) yesterday, which argues that the global economy is on the verge of a new recession. Another slump, according to the ILO, is likely to trigger mass social unrest.

The OECD expects growth in Europe to recover to 1.5 per cent in 2013 and to hit 2.5 per cent in the US. But it also warns that, if the eurozone debt crisis takes a turn for the worse, and if the US cuts its deficit too rapidly, GDP in some major OECD nations could fall by up to 5 per cent by the first half of 2013. Despite the bleak outlook for the US and Europe, the OECD forecasts that emerging economies will still grow by 6.7 per cent in 2012. China's is forecast to grow by 8.6 per cent.