The global economic recovery is fragile and could be derailed by the ongoing Eurozone debt crisis, the Organization for Economic Co-operation and Development (OECD) warned in its latest economic outlook report, released Tuesday.
The Paris-based think-tank downgraded the outlook for the euro area economy. It now sees a 0.1 percent contraction in economic activity in 2012, compared to 0.2 percent growth projected in the November report.
The group expects Eurozone to return to growth in 2013. Gross domestic product is forecast to rise 0.9 percent next year, weaker than the 1.4 percent growth projected in November.
"The crisis in the Eurozone remains the single biggest downside risk facing the global outlook," OECD Chief Economist Pier Carlo Padoan said.
The OECD also warned that the failure to act now could lead to a worsening of the European crisis and spillovers beyond the euro area, with serious consequences for the global economy.
"Avoiding such a scenario requires action to be taken both at country and supranational level," the group said in its report.
It repeated the suggestions made at the recent EU summit and urged further enhancement of the firewall to prevent contagion.
Boosting the European single market, increasing European Investment Bank funding for infrastructure projects, and making better use of European Central Bank balance sheets are among the group's recommendations to contain the crisis.
In Europe, the adverse impacts of fiscal consolidation on near-term growth may be significant, particularly in countries hardest hit by the euro crisis, the report said.
"With slow growth, high unemployment and limited room for manoeuvre regarding macroeconomic policy space, structural reforms are the short-run remedy to spur growth and boost confidence", OECD Secretary-General Angel Gurría said during the launch of the report in Paris.
Among the Eurozone members, Germany is expected to grow 1.2 percent in 2012 and 2 percent next year. France's GDP is projected to grow just 0.6 percent in 2012 and 1.2 percent in 2013.
Spain is forecast to contract 1.5 percent this year and then by 0.75 percent next year as budgetary consolidation and deleveraging in the private sector weigh on domestic demand.
In Spain, unemployment rate will likely rise above 25 percent next year. the OECD predicted. The budget deficit is seen falling from 8.5 percent of GDP in 2011 to 3.3 percent in 2013.
According to the report, the U.K. economy may grow 0.5 percent this year and 1.9 percent in 2013.
Meanwhile, OECD upped the growth outlook for the U.S. to 2.4 percent from 2 percent projected earlier and said private sector demand may push activity up in the world's largest economy.
Growth forecast for 2013 was revised up slightly to 2.6 percent from previous prediction of 2.5 percent.
The 2012 GDP outlook for Japan was retained at 2 percent, while the projections for 2013 was cut marginally to 1.5 percent from 1.6 percent.
GDP forecast for OECD area was maintained at 1.6 percent in 2012. The outlook for 2013 was lowered to 2.2 percent from 2.3 percent.
OECD said that the global economy is gradually gaining momentum, but the recovery is fragile and extremely uneven across different regions.
The global growth forecast for this year was left unchanged at 3.4 percent, while the predictions for next year were revised slightly lower to 4.2 percent from 4.3 percent forecast previously.
Activity remains strong in most emerging-market economies, the report noted. OECD now expects the Chinese economy to grow 8.2 percent in 2012 and 9.3 percent in 2013.
These were weaker than the November projections of 8.5 percent and 9.5 percent for 2012 and 2013 respectively.
Last month, the International Monetary Fund raised its global growth projections for this year and next to 3.5 percent and 4.1 percent, respectively. IMF sees 0.3 percent GDP contraction in Eurozone this year.
by RTT Staff Writer
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