OECD cuts eurozone growth forecast and warns of external risks

The OECD has cut its global growth expectations again and warned that the eurozone faced not just internal challenges but also risks from the US and emerging market economies.

It raised a red flag over deflation and called on the ECB to consider printing money through quantitative easing — a move the bank has so far resisted.

Ireland got several mentions during the launch of its global economic outlook, being held up as an example of a country for which reforms, especially cutting labour costs, was paying off.

But for the country to continue along an upward path, it was essential to restore the banking system and reduce youth and long-term employment, including retraining those previously working in construction, it said.

The government-backed body representing more than 30 developed world economies forecast anaemic growth in the euro area over the next two years, at just 1.9% by the end of 2015, while inflation is forecast at 1.3% in the fourth quarter of 2015.

OECD chief economist, Pier Carlo Padoan, said that the ECB had done the right thing in cutting interest rates, but warned that as the space for taking further action was shrinking, the challenges were not.

“If deflationary risks get stronger, we recommend the ECB take other unconventional — to the EU at least — measures,” Mr Padoan said.

Deflation may be a small risk, but it was not a zero risk, he said.

The ECB under its rules cannot buy bonds directly from governments but can on the secondary market.

The board is deeply divided on the issue but with president Mario Draghi overruling five members on the decision to cut the interest rate in November, he could take a tough stance on this also.

Deflation undermines the growth needed to ensure the periphery countries can cope with their debt.

Surplus countries, including Germany were making little if any adjustment, and Germany needed to liberalise services to help rebalance and strengthen demand.

“We think if there had been a greater rebalancing, greater demand by the German side, within the EU there would have been a smoother adjustment, adjustment would not have had to be done by such large evaluations and at the expense of such relatively large unemployment figures,” said secretary general Angel Gurría.

Mr Gurria added that changes are happening and that Germany’s 7% current account surplus was not now at the expense of the rest of Europe as their exports are within the EU, which was an important change.

The banking system was a major drag on growth and repairing the financial sector was essential, Mr Padoan said, adding that if it was not then other policies would not work.

He said more capital must be provided if the asset quality review and stress tests show it is needed, and cited progress on banking union.

“There is progress towards banking union but the transition promises to be complex and delicate as the criteria and responsibility for regulation, supervision, and resolution of banks have to be clarified,” the report said.

Unemployment will inch down in the eurozone by no more than 1 basis point a quarter, reaching 11.7% at the end of 2015.

A similarly slow progression is predicted for the US, but growth will be around 2 basis points more and unemployment more than 5 basis points. Inflation will also remain below 2% but around 5 basis points above that in the euro area.


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