The Organization for Economic Cooperation and Development cut its global growth forecasts for this year and next as emerging-market economies including India and Brazil cool.
The world economy will probably expand 2.7 percent this year and 3.6 percent next year, instead of the 3.1 percent and and 4 percent predicted in May, the Paris-based OECD said in a semi-annual report today.
“Most of the emerging economies have underlying fragilities that mean they cannot continue growing as they used to,” OECD Chief Economist Pier Carlo Padoan said in an interview. “They used to be an important support engine for global growth in bad times. Now the reverse is true and advanced economies can’t be said to be in very good times again.”
The reduced growth prospects underline how the global economy remains vulnerable five years after the collapse of Lehman Brothers Holdings Inc. While the euro-area has exited a recession, the OECD said the European Central Bank should look at ways to ease policy further and the Federal Reserve must keep an accommodative stance for some time before it begins tapering its stimulus.
“The Fed is in a very tricky position,” Padoan said. “Many people were surprised by the huge reaction when discussion about tapering was introduced. The Fed has to re-assess market reactions and this makes deciding when to taper more difficult. But it will have to happen eventually.”
In the report, the OECD sees India’s economy expanding 3.4 percent this year and 5.1 percent in 2014, down from 5.7 percent and 6.6 percent previously. It cut its forecast for Brazil to 2.5 percent and 2.2 percent from 2.9 percent and 3.5 percent.
Growth in the U.S. will be 1.7 percent and 2.9 percent this year and next, broadly similar to the outlook in May, while Japan’s gross domestic product will increase 1.8 percent and 1.5 percent. On Japan, the organization said that with government debt more than 230 percent of GDP, a “credible fiscal consolidation plan” to achieve a surplus in 2020 “is a top priority.”
The OECD sees a 0.4 percent contraction in the euro area, less than the 0.6 percent previously forecast, and expansion of 1 percent in 2014.
The OECD also gave 2015 forecasts for the first time. The world economy will expand 3.9 percent that year, with the U.S. growing 3.4 percent, the euro zone 1.6 percent and Japan 1 percent, according to the report. China will grow 7.5 percent
The Frankfurt based-ECB delivered a surprise rate cut Nov. 7, reducing its main re-financing rate to 0.25 percent after euro-area inflation slowed to 0.7 percent, less than half the central bank’s target level. The OECD said the ECB should look at non-standard monetary measures to further bolster an economy suffering from record-high unemployment, bank de-leveraging and tight credit conditions.
The euro area’s nascent economic recovery lost momentum in the third quarter as growth in Germany slowed and France’s economy unexpectedly contracted. The OECD said the growth is “lagging and uneven” and unemployment “remains very high.”
“In Europe, monetary policy could be more supportive,” Padoan said. “We think deflation is a risk.”
Among emerging-market economies, China is faring best as it adjusts policy to confront a changing global outlook. Chinese GDP will rise 7.7 percent this year and 8.2 percent in 2014 as a “small fiscal stimulus” revives domestic demand, the OECD said. While the recovery is “subdued” compared with recent history, money and credit growth need to be reined in, according to the report. The OECD urged the government to increase social benefits, financial liberalization and tax reform.
“China continues to be very strong,” Padoan said. “What sets China apart is that it has been growing because of structural change as the government addressed the economy’s weaknesses quickly. It’s becoming more and more of a middle income country.”