OECD warns of 'severe recession' in eurozone, cuts Ireland's forecast too

OECD warns of 'severe recession' in eurozone, cuts Ireland's forecast too

The 17-country eurozone risks falling into a “severe recession”, the Organisation for Economic Co-operation and Development warned today, as it called on governments and Europe’s Central Bank to act quickly to stop the slowdown spilling over into the global economy.

OECD chief economist Pier Carlo Padoan said the eurozone is “close to” the possible scenario of a 2% economic contraction this year that the Paris-based think-tank laid out as its worst-case scenario last November.

The body cut Ireland's growth forecast from 1% to 0.6% this year - and says Eurozone growth will be in the region of 0.1%.

Mr Padoan made his comments as the OECD, which comprises the world’s most developed economies, released its twice-yearly global economic outlook.

The report forecasts a longer and deeper contraction in the eurozone than predicted in November, with the eurozone economy expected to shrink in 2012, and only manage a feeble recovery in 2013.

“Today we see the situation in the euro area close to the possible downside scenario” in the OECD’s November report, “which if materialising could lead to a severe recession in the euro area and with spillovers in the rest of the world”, Mr Padan told reporters before the report’s release.

The OECD’s new forecast shows Europe falling behind the United States, where growth is seen accelerating both in 2012 and 2013.

“There is now a diverging trend between the euro area and the US, where the US is picking up more strongly while the euro area is lagging behind,” Mr Padoan said.

The OECD raised its forecast for US growth this year to 2.4%, and to 2.6% for 2013. The eurozone will shrink 0.1% this year and grow 0.9% in 2013, the OECD said.

The OECD’s forecast is still more optimistic about both the US and Europe than the International Monetary Fund. Last month the IMF said in its own global economic forecast that the US should expand 2.1% this year, while Europe should shrink 0.3%.

Mr Padoan called on eurozone leaders to adopt a “policy compact” to promote growth even while reducing deficits.

French President Francois Hollande has made securing such a pact the focus of his European diplomacy in the first weeks of his administration.

So-called eurobonds – debt issued jointly by countries in the currency bloc - could be used to recapitalise banks, Mr Padoan said.

He also reiterated his call of six months ago for the ECB to do more to stem Europe’s crisis.

The ECB has an “essential” role to play in solving Europe’s crisis, Mr Padoan said, both by using its balance sheet firepower to shore up banks and by lowering interest rates.

The ECB should also consider renewing the “unconventional measures” it used last year such as buying up government bonds, “if there is need to cope with contagion problems”, he added.

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