OECD warns on euro crisis spillover

Wed, May 23, 2012, 01:00

GLOBAL RECOVERY could be derailed by the euro crisis, the Organisation for Economic Co-operation and Development (OECD) warned yesterday.

According to the OECD’s latest economic outlook, the global economy is gradually gaining momentum but the recovery is fragile.

GDP growth across the OECD is projected to slow from an annual rate of 1.8 per cent in 2011 to 1.6 per cent in 2012, before recovering to 2.2 per cent in 2013, according to the outlook.

The OECD believes that the euro area economy, as measured by GDP, will not grow this year. However, while the euro area is forecast to contract by 0.1 per cent this year, it is expected to pick up to 0.9 per cent in 2013.

“The crisis in the euro zone remains the single biggest downside risk facing the global outlook,” said OECD chief economist Pier Carlo Padoan. “The risk is increasing of a vicious circle, involving high and rising sovereign indebtedness, weak banking systems, excessive fiscal consolidation and lower growth”.

The OECD cut its 2013 forecast for the Irish economy when compared to its previous projections.

It predicts the Irish economy will grow by 2.1 per cent in 2013, which is lower than previous forecasts of 2.4 per cent.

Unemployment in Ireland will hit 14.5 per cent this year according to the outlook, but will ease slightly to 14.4 per cent in 2013.

The OECD said business and household confidence remained weak in Europe, while financial markets were tight and the adverse impacts of fiscal consolidation on near-term growth may be significant, particularly in countries hardest hit by the euro crisis.

It warned that failure to act 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, it said, requires action to be taken both at country and supranational level.

It said fiscal consolidation and structural measures must proceed hand in hand, to make the adjustment process as growth-friendly as possible.

“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.