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OECD Calls for Euro-Area Confidence Boost as G-7 Economies Cool

Sept. 6 (Bloomberg) -- The Organization for Economic Cooperation and Development said that Europe’s debt crisis is hurting growth across Group of Seven economies and urged euro-area authorities to bolster confidence.

“The loss of momentum at the G-7 level may persist throughout the latter half of this year, with the recession in the euro area and associated trade and confidence headwinds enduring,” the OECD said in a report published today. “With the euro-area crisis still the most important risk for the global economy, further policy action is needed to instill more confidence in monetary union.”

The Paris-based organization, which advises its 34 member governments on economic policy, cut its gross domestic product forecasts for the main euro economies. Germany will expand 0.8 percent this year instead of the 1.2 percent predicted in May, while France will expand 0.1 percent instead of 0.6 percent and Italy will shrink 2.4 percent instead of 1.7 percent, it said.

The report comes as European Central Bank President Mario Draghi prepares to set out details of a bond-purchase plan later today that is intended to counter investor concern about the breakup of the single currency. Economists are split over whether the ECB will also lower the benchmark rate to a new record low, with 30 of 58 in a Bloomberg survey predicting a quarter-point cut to 0.5 percent and 28 forecasting no change.

‘Exit Fears’

The OECD urged the Frankfurt-based central bank to cut borrowing costs and endorsed the broad outline of the awaited bond-buying plan. Draghi will hold a briefing at 2:30 p.m., 45 minutes after the ECB announces its interest-rate decision.

“In the euro area, the interest rate on the marginal lending facility should be lowered,” the OECD said. “It is crucial to stem exit fears. This could be achieved by the ECB undertaking bond market intervention to keep spreads within ranges justified by fundamentals.”

For their part, euro-area banks and governments should move toward “full recognition of non-performing loans, enforced by common supervision and the availability of area-wide public funds for recapitalization,” the OECD said.

The U.K., which isn’t a member of the single currency, is also suffering from the region’s woes. GDP will shrink 0.7 percent this year instead of the previously predicted expansion of 0.5 percent, the OECD said. The forecast doesn’t account for likely growth shifts following the additional Diamond Jubilee bank holiday in June or the London Olympic Games last month.

U.S. Japan

By contrast, the U.S., the world’s largest economy, will probably grow 2.3 percent this year, according to the OECD.

The U.S. has “comparatively stronger growth, reflecting inter alia progress in balance-sheet adjustment and improving housing market conditions,” the OECD said. Additional easing of monetary policy “would have to be provided if the labor market situation were to deteriorate and fiscal tightening proves excessive in 2013.”

In Canada, the economy may grow 1.9 percent this year, while Japan is seen expanding 2.2 percent, today’s report showed. The OECD said that cooling inflation means that “some of the recent policy restraint could be clawed back in China, without providing an economic forecast.

‘‘Likely durable changes are taking place in the geographical composition of global imbalances, with the euro area surplus rising on soft domestic demand and fiscal consolidation,’’ the OECD said. ‘‘In the U.S. an increasing non-oil deficit is offset by an improving oil balance.’’

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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