OECD warns on world growth as ECB changes policy

PARIS: The eurozone debt crisis threatens to create pockets of recession and a great degree of uncertainty, a gloomy OECD report said on Thursday, an unsettling environment that forced a change of policy at the European Central Bank.

A new recession stalked some rich countries, the OECD said with downward revisions to earlier growth forecasts multiplying amid deep concerns that the debt levels in many major economies blocked their ability to fight recession through spending and tax cuts.

"Growth is turning out to be much slower than we thought three months ago and the risk of hitting patches of negative growth has gone up," OECD chief economist Pier Carlo Padoan said.

The situation was serious enough that the European Central Bank chief warned, after announcing a hold on interest rates, that there was an "enormous degree of uncertainty" surrounding both the world and eurozone economies.

Urgent calls for Europe to act have multiplied, most recently by Treasury Secretary Timothy Geithner urging Europe for "more forceful action".

But most eurozone countries are hampered by immense debt loads, seriously limiting options to address recessions that some data shows may be just around the corner, even in powerhouse Germany.

The OECD's Padoan said that the policy imperative for OECD countries in order to stave off a slowdown was to rebuild confidence. Consumer and business confidence in major OECD economies had weakened in recent months, alarming investors and leaders.

To rebuild confidence, the OECD insisted on the urgency for the eurozone to apply rescue actions agreed in July and to tighten financial discipline across the single currency union.

The series of bad signs also helped increase calls for monetary stimulus, with the OECD urging central banks to leave interest rates as they are and avoid action that could further dissuade activity.

"If in the coming months signs emerge of the weakness enduring or the economy risks relapsing in recession, rates should be lowered when there is scope," the OECD wrote in its report.

The ECB heard the calls, effectively announcing an end to a cycle of rising interest rates, leaving its benchmark rate at 1.5 percent. Just 45 minutes earlier the Bank of England held rates at a record low level in an effort to reverse dwindling growth in Britain.

Earlier on Thursday, more evidence of falling output within the eurozone emerged and not only in the reduced forecasts by the OECD. In Greece, at the centre of the debt crisis, the economy shrank 7.3 percent in the second quarter on a 12-month comparison and in Portugal, gross domestic product (GDP) contracted by 0.9 percent. Those data "add to evidence that the recessions there will be more drawn out than either government expects, suggesting that both economies will struggle to meet their budget deficit reduction targets," said Ben May, European economist at Capital Economics.

But Germany and France are being hit with fresh doubts on growth as well.

The OECD said Germany, the main driving force in the eurozone, could grow by 2.6 percent in the third quarter but was set to contract by 1.4 percent in the fourth quarter.

France is now expected to grow 0.9 in the third quarter and 0.4 percent in the fourth, but fresh official trade figures released on Thursday showed a trade deficit of more than 6 billion euros, reflecting a persistent problem for French policy-makers and an indication that growth would be hit in coming months as well.

Economist Marc Touati at Assya Compagnie Financiere said the worsening trade figures should be added to fragile recent consumer and investment data and signaled a downward revision to third quarter growth.

Germany trade figures also surprised analysts, with Berlin showing a smaller trade surplus than expected of 10.4 billion euros in July from 12.7 billion in June.

In this troubled setting, analysts fear that the slightest setback could trigger widespread gloom, much like the fall of Lehman Brothers in 2008 precipitated a deep global recession.

With banks again a concern, the OECD implored lenders to strengthen their capital because of their exposure to eurozone debt.

The ECB said it was ready to provide eurozone banks with all the liquidity they needed, though Trichet insisted that "liquidity is not an issue for the banking sector as a whole." But whatever the case, the ECB still holds the master cards to help avoid more downward revisions to growth figures in some key economies. The central bank continues to buy up bonds issued by eurozone countries who find themselves unable to finance themselves on the markets at affordable rates and provides cash on a daily basis to distressed banking systems whose downfall could send the world economy into a dangerous downward spiral.

Copyright AFP (Agence France-Presse), 2011