By Nick Mann | 6 September 2012

World economic growth is weakening as the eurozone crisis increases its drag on the global economy, the Organisation for Economic Co-operation and Development said today.

The eurozone’s three largest economies are expected to enter recession in the second half of this year, according to the OECD’s latest six-monthly Interim economic assessment. It forecasts an average 1% contraction in gross domestic product in Germany, France and Spain during the third quarter of 2012 and 0.7% in the final three months of the year.

As a result, the Group of Seven leading economies are now expected to grow by just 0.3% in the third quarter, followed by 1.1% in the fourth. Over 2012 as a whole, the OECD expects GDP in the G7 countries to grow by 1.4%, the same as in 2011.

OECD chief economist Pier Carlo Padoan explained that the lack of confidence caused by the eurozone crisis was spreading, in particular in light of the ‘slow’ and ‘costly’ nature of the economic adjustment taking place in the single currency bloc.

‘Resolving the euro area’s banking, fiscal and competitiveness problems is still the key to recovery,’ he said.

In particular, the OECD called for the eurozone’s debtor countries, Greece, Ireland, Italy, Portugal and Spain, to pursue wage restraint and fiscal consolidation policies. They should also carry out structural reforms to increase productivity and reallocate resources to export activity.

At the same time, the bloc’s richest countries, such as Germany, should allow for higher wages and inflation and also carry out market reforms to boost consumption and investment in domestically focused sectors.

It also urged the European Central Bank to intervene in the bond market by buying government bonds from the countries worst hit by the crisis. The ECB is expected to reveal details later today of a new bond buying plan.

But the OECD warned that there were other risks to its forecasts from outside the eurozone.

Padoan explained: ‘A number of downside risks threaten the outlook, including the potential for further increases to already high oil prices, excessive fiscal contraction, notably in the United States in 2013, and further declines in consumer confidence linked to persistent unemployment.’