OECD sees threat of recession, worse eurozone crisis

AFP, Thursday 8 Sep 2011

Global economy body suggest central banks consider interest rate cuts, warning of the potential for recession in major economies but noting the danger is 'not in the magnitude of 2008-2009'

Recession scenes
A vision of the future? A man pushes a shopping trolley past a shop closing down in south London (Photo: Reuters)

A new recession stalks some rich countries and the eurozone crisis could deepen, the OECD warned on Thursday urging most central banks not to raise, and maybe to cut, interest rates.

The OECD insisted on the urgency for the eurozone to apply rescue action agreed in July and to tighten financial discipline.

Banks had to strengthen their capital because of their exposure to eurozone debt, it also stressed.

The OECD revised sharply down its growth forecasts for the rest of the year for Group of Seven (G7) rich industrialised countries and expected at least one quarter of contraction in Germany and Italy.

The warning of shrinkage in Germany contrasted starkly with recent data showing dynamic, albeit possibly slowing, activity in the German economy.

The organisation gave different emphasis to the threat of recession in the French and English versions of its forecasts. In French it said: "The possibility of recession is not ruled out in some big economies in the OECD."

However, the English version read: "The risk of more negative growth going forward has become higher in some major OECD economies."

Both versions added: "But a downturn of the magnitude of 2008-2009 is not foreseen."

Just before the Bank of England and European Central Bank were to announce their interest rate decisions, the OECD said: "Policy rates in most OECD economies should be kept on hold.

"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."

It said: "The sovereign debt crisis in the euro area could intensify again."

The US economy would grow by 1.1 percent in the third quarter of this year from the previous quarter, and by 0.4 percent in the fourth quarter, the OECD said.

The eurozone was set for third-quarter growth of 1.4 percent but switching into a downturn of 0.4 percent in the last quarter.

The Organisation for Economic Cooperation and Development stressed the high level of uncertainty mainly because of the impact of debt problems in the United States and in Europe.

A recession is generally considered to occur if quarterly growth is negative from output in the previous quarter, twice in a row.

In a particularly grim interim assessment, the OECD said the Japanese economy could grow by 4.1 but would then show zero growth in the fourth quarter.

The main driving force in the eurozone, Germany could grow by 2.6 per cent in quarter three but was set to contract by 1.4 per cent in the fourth quarter.

For France the estimates were plus 0.9 and plus 0.4 per cent, for Italy minus 0.1 per cent and then plus 0.1 per cent, for Britain plus 0.4 and plus 0.3 per cent and for Canada plus 1.0 and plus 1.9 per cent.

The report warned: "The impact of the sovereign debt woes in Europe and the United States and the associated turbulence in stock markets over the summer have not yet fully fed through into the indicators underpinning the projections."

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