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OECD slashes G7 growth forecasts on weaker Europe outlook
September 6, 2012 / 9:02 AM / 5 years ago

OECD slashes G7 growth forecasts on weaker Europe outlook

PARIS (Reuters) - The outlook for major developed economies has darkened in recent months as the euro zone crisis has spread to the region’s core, the OECD said on Thursday, urging the European Central Bank to intervene on bond markets to rein in the turmoil.

A general view of a structure of the Euro currency sign is seen in front of the European Central Bank (ECB) headquarters in Frankfurt August 2, 2012. REUTERS/Alex Domanski

Forecasting 2012 growth of 1.4 percent growth for the Group of Seven economies as a whole, the OECD’s estimates diverged widely across group, with European countries lagging significantly.

“The euro area remains a crucial point, the epicentre of the crisis,” the Paris-based Organisation for Economic Cooperation’s chief economist Pier Carlo Padoan told journalists.

“It needs to be addressed for its own sake; it needs to be addressed for the stability of the global economy. It is critical that the ECB can go ahead with bond market interventions.”

More broadly, central banks in countries where growth was weak and inflation tame should not hesitate to cut interest rates, the Paris-based organisation for Economic Cooperation and Development said.

More U.S. easing would be warranted if the labour market worsened and the government was forced to tighten its belts.

The OECD forecast 2.3 percent growth this year for the United States, down marginally from an estimate of 2.4 percent in May.

It cut its forecast more sharply for euro zone powerhouse Germany, to 0.8 from 1.2 percent, saying the bloc’s debt crisis was increasingly weighing on core economies.

Italy’s outlook was even more grim, with its forecast slashed to -2.4 percent from -1.7 percent in May. France’s estimate was cut to 0.1 percent from 0.6 percent.

Diverging borrowing costs in euro zone economies were proof that monetary policy in the single currency area was disrupted, Padoan said, warning of dire consequences if this was neglected.

“This is of course an additional threat to the integrity of the euro area and therefore points to a risk of break up,” he said, urging the European Central Bank to buy bonds of the most troubled countries, hours before it was due to detail market intervention plans.

But ECB action alone was not enough to solve the region’s debt crisis and the foundations of a banking supervisory union needed to be quickly laid. Euro zone banks needed to be recapitalised by more than 500 billion euros, according to some calculations, he said.

Padoan said that euro zone countries carrying out painful reforms and slashing their budgets should not take a recent fall in bond yields as a sign to ease up or otherwise risk squandering efforts made so far.

The gloom was not limited to the euro zone, with the OECD cutting its forecast for British growth this year to -0.7 percent from 0.5 percent.

The OECD noted its May forecasts were built on a broader range of data and did not use the same models as its latest estimates.

In addition to the euro zone’s crisis, the OECD warned that a major risk to the global economic could arise in the form of a massive fiscal tightening in the United States at the end of the year, when tax increases and automatic government spending cuts are due to kick in under current legislation.

Reporting by Leigh Thomas; Editing by John Stonestreet

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