U.S. Fiscal Cliff Could Lead Global Recession, OECD Says

Failure to prevent the so-called fiscal cliff in the U.S. would increase the risk of a global recession, the Organization for Economic Cooperation and Development said, while adding that the “greatest threats” to the world economy lie in the euro area.

“If the fiscal cliff is not avoided, a large negative shock could bring the U.S. and the global economy into recession,” the Paris-based OECD said in its Economic Outlook report released today.

As the administration of President Barack Obama prepares to negotiate a budget agreement with Republicans in Congress, the OECD urged “smooth” implementation of tax increases, spending curbs and a higher debt ceiling in the medium term.

“Reducing the large federal budget deficit is necessary to restore fiscal sustainability, but this should be done gradually and in the context of a well-identified medium-term consolidation plan,” today’s report said.

The fiscal cliff refers to the $607 billion in federal spending cuts and tax increases scheduled to take effect early next year unless Congress acts. Treasury Secretary Timothy F. Geithner said Nov. 16 the deadlock can be resolved “within several weeks” while the uncertainty it has created “already is having an effect on consumer confidence and the economy.”

Absent the automatic spending cuts and most of the tax increases currently set to take effect next year, the U.S. federal deficit would come to $1.04 trillion in fiscal year 2013, the fifth consecutive year of budget gaps exceeding $1 trillion, according to the non-partisan Congressional Budget Office.

Europe Crisis

The OECD report also said it is “urgent” to solve Europe’s debt crisis.

“In the euro area, where the greatest threats to the world economy remain, progress in adjustment and in strengthening institutions has been significant over the recent past,” the OECD said. “However, challenging fiscal sustainability conditions in some countries risk sparking a chain of events that could considerably harm activity in the monetary union and push the global economy into recession.”

A “major financial event” in the euro zone “would spill over into the rest of the global economy, including the United States,” Pier Carlo Padoan, OECD chief economist, said during a conference call with reporters yesterday.

Federal Reserve

The Federal Reserve should stand ready to enlarge its third round of quantitative easing program if the U.S. economy deteriorates, the OECD said.

“If the economic situation were to turn out significantly worse than expected, the Federal Reserve should further expand the size of its purchases of government and mortgage-backed securities and start purchasing other types of assets if necessary to ease financial conditions,” according to today’s report.

The OECD also said the U.S. labor market has recovered “very slowly,” with the unemployment rate likely to decline to 7.5 percent as a percentage of the labor force at the end of 2014.

The OECD projects U.S. gross domestic product at market prices to grow by 2.2 percent this year, 2 percent in 2013 and 2.8 percent in 2014. For the euro area, the group expects a 0.4 percent contraction in 2012 and 0.1 percent decline in GDP in 2013.

The OECD “uses its wealth of information on a broad range of topics to help governments foster prosperity and fight poverty through economic growth and financial stability,” according to its website. Its 34 member countries include the U.S., Japan, Chile, Australia, France, the U.K. and Poland.

To contact the reporter on this story: Kasia Klimasinska in Washington at kklimasinska@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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