Advanced economies are looking at two years of weak growth and high unemployment and the outlook is likely to worsen unless Europe fails to rein in its sovereign-debt crisis, the Organization for Economic Development and Cooperation said Monday, as it slashed next year's growth prediction for the U.S. and the euro zone.
In a brief outlook published three days ahead of a meeting of the Group of 20 industrial and developing nations in Cannes, the OECD urged the European Central Bank to cut rates to restore growth in the world's largest economic zone, and recommended other central banks to keep rates on hold and provide liquidity to the financial system to ease market tensions.
The OECD said the U.S. economy will grow 1.8% next year, less than the 3.1% expansion it had forecast in May, and will pick up speed only in 2013, with a 2.5% expansion. The OECD now expects the euro zone's gross domestic product will expand 0.3% next year, far below the 2% growth it forecast five months ago.
Debt-to-GDP ratios will keep rising, reaching in two year's time 108.7% in the U.S., 97.6% in the euro zone and 227.6% in Japan, the OECD figures showed.
The Paris-based think-tank hailed the EU agreement reached in Brussels last week, but warned the bloc against delaying the accord's implementation and urged it to give investors more details about the plan as soon as possible.
At their latest emergency summit, euro-zone leaders agreed last week to provide a further €100 billion ($141.50 billion) package to ailing Greece, and agreed to ask private holders of Greek debt write off 50% of their holdings. The euro zone also decided to ask lenders to increase their Tier 1 capital ratios by next June and increased by four or five times the available resources of its bailout fund, the European Financial Stability Facility.
"The measures identified by the EU leaders go in the right direction to resolve the euro area sovereign-debt crisis," the OECD said. "However, more detailed information is needed on the specific measures, including the options for EFSF enhancement."
The OECD urged European governments to stand ready to take decisive measures if and where banks were unable to raise equity from markets, and called for a greater use of the ECB balance sheet to fight the crisis.
Monetary authorities in developed economies should do their part, the OECD said, by continuing to provide ample liquidity to ease financial market tensions. "Further monetary relaxation, including through unconventional measures, would be warranted if downside risks intensify," the OECD said.
In the emerging-market economies, on the other hand, the stance of monetary policy should be guided by the outlook for growth and inflation, which remains comparatively high.
G-20 economies are expected to grow 3.8% next year and 4.6% in 2013, the OECD said, urging leaders in Cannes to adopt all necessary measures to sustain growth.
For their part, European leaders are trying to shift the focus away from Europe, arguing that the bloc has already done its part to stabilize markets.
Herman Van Rompuy, president of the European Council, and José Manuel Barroso, president of the European Commission, said in a letter addressed to their G-20 partners Saturday evening that the upcoming summit should match European efforts to ensure the stability of the world economy. The G-20 should decisively deal with a number of non-European issues, they said, including the question of exchange rates of surplus countries.
Growth in the G-20 will be essentially supported by emerging markets, although even growth in China, the world's second-largest economy, will soften to 8.6% next year, the OECD said. A more dynamic economic environment in Asia will also benefit the Japanese economy, which the OECD expects to grow 2.1% next year, only marginally less than the 2.2% it forecast in May.
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