The Organization for Economic Cooperation and Development urged Group of 20 governments and central banks to “act decisively” to restore confidence as it lowered its growth forecasts for the U.S. and the euro area.
The U.S. economy, the world’s largest, will expand 1.7 percent this year and 1.8 percent next, the Paris-based organization said in a report today. In May, it forecast U.S. growth of 2.6 percent and 3.1 percent respectively. The euro-area economy may grow 1.6 percent in 2011 and 0.3 percent in 2012 instead of a previously predicted 2 percent in each.
Today’s forecasts underline the challenges facing G-20 leaders before they gather in Cannes, France, later this week to seek a coordinated response to a cooling global economy and Europe’s spreading sovereign debt crisis. The OECD, which advises member governments on economic policy, said today that growth has been undermined by poor policies and a "marked slowdown" looms.
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“Much of the current weakness is due to a generalized loss of confidence in the ability of policy makers to put in place appropriate responses,” the OECD said. The G-20 should “act decisively to restore confidence” and “the outlook will likely be better than anticipated if comprehensive action is taken.”
Central banks in developed nations should keep interest rates on hold or cut them “where possible,” the OECD said. G-20 economies as a whole will grow 3.9 percent this year and 3.8 percent in 2012, it said.
Key to global growth prospects is the outlook for the euro area, where leaders agreed on Oct. 27 to increase the size of their bailout fund to 1 trillion euros ($1.4 trillion) and write down Greek debt by 50 percent. The OECD today urged the region’s leaders to put their plan into action “promptly and forcefully,” saying that the outlook for growth will be “gloomier” if they fail to follow through.
The agreement “has to be not only adopted but implemented,” OECD Secretary General Angel Gurria said today in an interview in Paris.
He urged bondholders to support the plan to reduce Greece’s debt burden. “Every single creditor has to contribute,” he said. “You can’t have creditors out there trying to get 100 percent.”
The European Central Bank should also bolster the region’s economy by cutting interest rates, Gurria said. The ECB, where Mario Draghi takes over as president from Jean-Claude Trichet tomorrow, lifted its benchmark rate four months ago to 1.5 percent. Its governing council meets again this week to asses whether that level is appropriate.
“I would recommend that they reduce the interest rate,” Gurria told Bloomberg Television. “They may be concerned about future inflationary pressures but the problem today is about growth.” The ECB has “a little bit of room” to cut “and they should use that room,” he said.
The OECD also gave its first forecasts for 2013, saying the G-20 economies will expand 4.6 percent that year. The U.S. will grow 2.5 percent in 2013 and the euro area 1.5 percent, while Japan will expand 1.5 percent and China 9.5 percent.
“The message we have today is that it doesn’t look good,” Gurria said. Without “changes, we’re going to have continued slow growth, high unemployment, high accumulated debt. We have to shake this off.”
The OECD sees the U.S. government debt burden amounting to 108.7 percent of gross domestic product in 2013 and the euro area’s to 97.6 percent. Japan’s public debt will amount to 227.6 percent of GDP.
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