OECD urges more stimulus as growth forecasts cut

The OECD yesterday slashed growth forecasts for major developed economies, urging much more aggressive European Central Bank (ECB) stimulus to ward off the risk of deflation in a subdued eurozone.

The call adds to growing pressure on the eurozone, and the ECB in particular, to boost growth ahead of a meeting of finance ministers and central bankers from the G20 economic powers later this week in Australia.

Updating its growth forecasts for major developed economies, the Organisation for Economic Cooperation and Development projected growth in the eurozone at only 0.8% this year and rising only slightly next year to 1.1%.

That marked a sizeable downgrade from its May economic outlook for the eurozone, when the Paris-based organisation forecast growth of 1.2% in 2014 and 1.7% in 2015.

In comparison, the OECD saw the US economy growing 2.1% this year before accelerating to 3.1% in 2015. In May, the OECD forecast US growth of 2.6% this year and 3.5% next.

The US is set to push European countries at the G20 meeting to step up measures to boost demand and economic growth in the face of the risk of deflation, according to a senior official at the US Treasury.

OECD acting chief economist Rintaro Tamaki said financial markets had largely ignored mounting geopolitical risks to the global economy and the eurozone’s worsening outlook.

“This highlights the possibility that risk is being mispriced again and the attendant danger of sudden corrections in the financial markets,” said Mr Tamaki.

The OECD said that though eurozone inflation, at a five-year low in August of 0.4%, should strengthen as demand recovers, levels close to zero raised fears of deflation.

Citing the example of Japan in the 1990s, Mr Tamaki warned that market inflation expectations, closely watched by the ECB, were a poor judge of future inflation trends when it sets monetary policy.

“Recent ECB action is welcome, but further measures, including QE [quantitative easing], are warranted,” said Mr Tamaki. “The perception that policy action is always too little too late needs to be changed.”

The ECB recently cut the cost of borrowing to near zero and pledged to buy repackaged debt in an effort to encourage lending to credit-starved companies.

However, so far it has shied away from the kind of quantitative easing carried out by counterparts in the US and Japan, consisting of a huge campaign of buying government and other bonds to lower the cost of borrowing.