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OECD Sees Solid Global Recovery Despite Risks


Global economic recovery is firmly underway, but serious downside risks remain, the Organization for Economic Cooperation and Development (OECD) said Wednesday.

In its twice-yearly world economic outlook report, OECD kept its global economic growth forecast steady at 4.2 percent for this year and 4.6 percent for 2012. The OECD region economies are expected to grow 2.3 percent this year and 2.8 percent in 2012, in line with previous forecasts in November.

The Paris-based think-tank said trade and investment are gradually replacing fiscal and monetary stimulus as the main drivers of growth. Confidence is rising, which could add further buoyancy to private sector activity.

However, OECD sees downside risks, including the possibility of further increases in oil and commodity prices and a stronger-than-projected slowdown in China.

The unsettled fiscal situation in the U.S. and Japan, renewed weakness in housing markets in many OECD countries and financial vulnerabilities in the euro area also pose serious risks to the outlook.

The report warned against historically high unemployment prevailing across the globe and urged governments to improve labor market policies that boost job creation and prevent high joblessness from becoming permanent. It is estimated that more than 50 million people are facing unemployment in the OECD area.

"This is a delicate moment for the global economy, and the crisis is not over until our economies are creating enough jobs again," said OECD Secretary-General Angel Gurria.

"There is also some concern that if downside risks reinforce each other, their cumulative impact could weaken the recovery significantly, possibly triggering stagflation in some advanced economies."

In advanced economies, structural reforms should be implemented to boost growth as governments are forced to withdraw fiscal and monetary stimulus launched in reaction to the crisis, the report said. Emerging economies must pay particular attention to the danger of overheating, which is increasing inflationary pressures, and in some cases, widening current account imbalances.

Vibrant domestic demand growth, negative supply shocks and strong capital inflows in non-OECD economies are generating inflationary pressures prompting policy restraint that could slow the recovery, OECD chief economist Pier Carlo Padoan said in the editorial to the report.

"Such a scenario calls for differentiated policy responses in advanced and emerging economies," the economist said.

OECD urged countries to make progress toward their fiscal consolidation goals, which are "increasingly urgent." The report noted that government debt in the euro area is set to rise to close to 96 percent of GDP average this year and to just above 100 percent of GDP in the OECD.

The group also indicated that interest rates must be increased especially in the U.S. and the U.K.

"The need to keep close-to-zero policy rates for risk management reasons has now faded and an early upward adjustment in policy rates to establish a visibly positive level, as in the euro area, is merited in the United States and the United Kingdom, but not yet in Japan," the report said.

OECD raised its expectations for the U.S. growth to 2.6 percent this year from 2.2 percent predicted in November.

Meanwhile, the outlook for Japan was slashed to 0.9 percent contraction this year from 1.7 percent expansion projected earlier. However, OECD sees Japan growth at 2.2 percent next year, faster than 1.3 percent forecast in November.

The Eurozone growth forecast for 2011 was lifted to 2 percent from 1.7 percent. The U.K. is seen expanding 1.4 percent this year, slower than March projection of 1.5 percent.

The outlook for China was cut to 9 percent from November projection of 9.7 percent. If past tightening is insufficient, inflationary pressures are likely to build further, ultimately necessitating strong further policy actions and raising a risk of a much deeper slowdown in the medium, OECD warned.

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