OECD lowers growth outlook on risks for emerging markets

Paris (AFP) - Growth in advanced economies will pick up speed this year and next, but mostly at a slower pace than forecast as new risks loom, especially from emerging economies, the OECD said on Tuesday.

Japan and the eurozone will do slightly better than expected in both years as austerity policies retreat, monetary stimulus is maintained and financial conditions improve, the OECD said.

But the US economy will grow less quickly than forecast, with the OECD pointing to political dysfunction in Washington and the eventual tapering of monetary stimulus as factors that could hamper recovery.

The organisation, a 34-nation policy forum for developed democracies, revised global growth of gross domestic product down by nearly half a percentage point both this year, to 2.7 percent, and next, to 3.6 percent.

In a first estimate for 2015, it foresaw growth of 3.9 percent.

Global "outcomes this year and near-term prospects appear a little weaker than had been expected in May, at the time of the previous Economic Outlook," the OECD said.

The future of monetary stimulus in the United States has become a central risk worldwide, the OECD said, adding to long-standing problems, such as the fragility of eurozone banks and a decade of soaring Japanese public debt.

The OECD urged the US Federal Reserve central bank to maintain its ultra-easy monetary policy for some time, and it suggested that the European Central Bank consider extra action to relax monetary conditions if deflationary pressures increased.

The latest OECD outlook report said that old worries "have been augmented by new concerns, most notably the possibility of significant financial instability in advanced and, especially, (emerging economies) during the exit from unconventional monetary policies in the United States."

Emerging economies, until recently a driver of global activity, could become a drag.

Moreover, the OECD warned, if political battles in Washington were to make a debt ceiling in the United States binding next year, the outcome could have "extreme" effects on the world economy.

Any automatic policy to cut spending by the US government, "could have large adverse effects on the stability and growth of the world economy," it said.

"To prevent the possibility of such disruptive effects", the debt ceiling currently being fought over in US Congress "should be abolished".

The forecast for US growth in 2013 was slashed to 1.7 percent from 1.9 percent, but edged up to 2.9 percent for 2014.

The OECD said that efforts to slow fiscal consolidation in the US and the eurozone were appropriate given slightly improving public finances and the uncertain economic outlook.

Japan on the other hand, must implement "strong fiscal tightening" in order to cut its debt.

But despite this overhang, Japan's recent efforts to jumpstart the economy will bear fruit with the OECD now forecasting 1.8-percent growth in 2013 instead of 1.6 percent. In 2014, Japanese growth will slow to 1.5 percent, hobbled by debt.

Eurozone still unsteady

The OECD said that the eurozone still had the potential to unsettle the world economy and urged the currency bloc to press on with its banking union reform which includes a stringent stress test for banks.

The OECD weakened its recession outlook in the currency area this year to contraction of 0.4 percent instead of 0.6 percent, and forecast growth of 1.0 percent in 2014.

The OECD noted that the US stimulus policy, spearheaded by outgoing Fed chief Ben Bernanke, had fuelled a global investment splurge. The benefits of this for emerging economies had become fully evident only when the chairman talked of reducing it.

Bernanke's floated the idea of tapering stimulus earlier this year. The prospect sent the currencies of Brazil, Turkey, Indonesia and India plummeting and pushed crucial foreign investment to the exits. The crisis had cooled since, but growth in these countries would be subdued and the risk of crisis endured.

China, less dependent on foreign funds, avoided the brunt of the tapering talk, but the OECD did lower the Chinese growth forecast to 7.7 percent this year, from 7.8 percent, and to 8.2 percent for next year.

In China, the OECD said growth was picking up "aided by a small fiscal stimulus and rapid credit expansion that did not slacken until June 2013" when state leadership changed hands.

The OECD said that by past standards, "the recovery is subdued, reflecting a marked slowing in potential growth in the past few years".