OECD Cuts Growth Forecasts, Citing Doubts About Survival of Euro: Economy

The Organization for Economic Cooperation and Development said growing doubts about the survival of Europe’s monetary union has caused global growth to stall and represents the main risk to the world economy.

The 34 OECD nations will grow 1.9 percent this year and 1.6 percent next, down from 2.3 percent and 2.8 percent predicted in May, the Paris-based organization said in its twice-annual global economic outlook released today. In a separate report, Morgan Stanley cut its forecast for 2012 global growth.

“Skepticism has grown that euro-area policy makers can deal effectively with the key challenges they face,” OECD Chief Economist Pier Carlo Padoan wrote in the report. Serious downside risks remain, linked to “loss of confidence in sovereign-debt markets and the monetary union itself.”

The remarks are the first from a major government body to highlight the possibility of a euro breakup and reflect the shift in the two-year-old crisis from the region’s periphery to its so-called core. Government bond yields for both Germany and France, Europe’s two largest economies, climbed last week as a German bond auction failed to get bids for 35 percent of the 10- year debt on offer.

‘Key Risk’

“The euro-area crisis represents the key risk to the world economy,” the OECD said. “Contagion has entered a new phase and spread beyond euro-area countries normally seen as fiscally vulnerable, suggesting that fiscal concerns are no longer the only driving force behind contagion.”

German bunds fell, sending yields up five basis points, or 0.05 percentage point, to 2.31 percent at 10:54 a.m. in London. They earlier reached 2.34 percent, the highest since Aug. 16.

The OECD, which advises members on policy, weighed in on a tussle about how involved the European Central Bank should be in crisis fighting, saying the lender needs to cut interest rates and to expand its balance sheet. The euro region’s rescue fund, or European Financial Stability Facility, also needs to be strengthened, it said.

“Decisive policies and the appropriate institutional responses will have to be put in place to ensure smooth financing at reasonable interest rates for sovereigns,” Padoan wrote. “This calls for rapid, credible and substantial increases in the capacity of the EFSF together with or including greater use of the ECB balance sheet.”

‘Rapid Escalation’

Moody’s Investors Service said today the “rapid escalation” of the crisis threatens all of the region’s sovereign ratings, and that credit risks will keep rising without steps to stabilize markets in the short-term. The rating company also questioned whether policy makers can move quickly enough.

Germany and the ECB have resisted calls for an expansion of the bond-buying program, while France and economists including Citigroup’s Willem Buiter and Jefferies International’s David Owen have urged the Frankfurt-based lender to do more to calm government-bond markets.

The euro area itself is already in a “mild” recession, with the region set to register growth of 1.6 percent this year and just 0.2 percent in 2012, the OECD said. Gross domestic product will expand by 1.4 percent in 2013, it said.

That compares with expected growth of 1.7 percent this year and 2 percent next year in the U.S., the world’s largest economy. Japan will shrink 0.3 percent this year before growing 2 percent in 2012 and 1.6 percent in 2013, the OECD said.

‘Fragile’ Recovery

Morgan Stanley said today the world economy will grow 3.5 percent in 2012, compared with an estimate of 3.8 percent published in August, citing an “anemic” expansion in the U.S. and a recession in Europe. It predicts global GDP will increase 3.9 percent in 2013.

Europe isn’t the only risk facing the global economy. The OECD cautioned that fiscal tightening in the U.S. should not forestall its “fragile” recovery and called for fiscal support to be implemented should the economy weaken.

“A serious downside risk is that no action will be agreed to counter strong, pre-programmed fiscal tightening in the U.S.,” the OECD said. “Much tighter fiscal policy than in the projection could tip the U.S. economy into a recession that monetary policy can do little to prevent.”

The Chinese economy may also “slow more than projected against the backdrop of the tightening of monetary conditions,” according to the report. “Further ahead, uncertainties relate to the extent to which stable, high-growth rates can be sustained.”

-- With assistance from Svenja O’Donnell in London. Editors: Simone Meier, Fergal O’Brien

To contact the reporter on this story: Mark Deen in Paris at markdeen@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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