By Nick Mann | 27 November 2012
The global economy could plunge back into recession unless the US and eurozone address their fiscal problems, the Organisation for Economic Co-operation and Development today warned.
In its latest six-monthly Economic outlook, the OECD forecast a ‘hesitant and uneven’ economic recovery over the next two years, with gross domestic product among its member countries projected to be 1.4% in both 2012 and 2013, before improving to 2.3% in 2014.
These outcomes could be ‘considerably weaker’ if the US fails to avoid the automatic tax increases and spending cuts known as the ‘fiscal cliff’ that will take effect in January unless a new budget plan is agreed by Congress.
‘If the fiscal cliff is not avoided, a large negative shock could bring the US and the global economy into recession,’ it said.
But the ‘greatest threats’ to the world economy come from the eurozone, the OECD said. The budgetary problems faced by some countries could spark a chain of events that could ‘considerably harm’ activity in the monetary union, pushing the global economy into recession.
Both the fiscal cliff and situation in the eurozone have contributed to the lack of confidence that is affecting the global outlook, the OECD said. Chief economist Pier Carlo Padoan attributed this to ‘insufficient or ineffective’ policy responses, ‘both in terms of too little short-term action and a lack of credible long-term strategies’.
He added: ‘This, in turn, seems to be determined not so much by a lack of understanding of the policy requirements, but rather by failure to reach consensus on the policy response.’
To address these challenges, countries should avoid ‘excessive’ fiscal consolidation. In the US, the OECD called for the federal budget to be tightened at a ‘more measured pace’ than the fiscal cliff would entail.
In the eurozone, countries should stick to the budgetary tightening they have already committed to, without taking additional measures. Japan was urged to finalise a ‘more detailed and credible’ medium-term fiscal consolidation plan, in light of its ‘extraordinarily high’ debt ratio.
If the global economy does slide towards recession, countries in a ‘robust’ fiscal position, such as Germany and China, should increase public spending.
‘Most other economies should either slow planned budgetary consolidation or, in the case of those with very high debt levels or under intense market pressure, allow the automatic stabilisers to operate fully,’ Padoan added.
