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OECD's global outlook dimmed by Eurozone crisis, U.S. 'fiscal cliff'

November 26, 2012|By Don Lee
  • Protesting municipal workers clash with riot police in the port city of Thessaloniki, Greece, earlier this month.
Protesting municipal workers clash with riot police in the port city of… (Sotiris Barbbaroussis…)

WASHINGTON -- Saying that the global recovery hangs in the balance, a leading international economic group called for "decisive policy action" to ensure that the fiscal risks in the U.S. and the ongoing debt crisis in Europe do not plunge the world back into recession.

As it is, major developed economies in the world are looking at a muted and uneven recovery over the next two years, according to the Organization for Economic Cooperation and Development.

The Paris-based OECD, in its latest economic outlook released Tuesday, sees the U.S. continuing its modest growth, the 17-nation Eurozone stuck in recession well into next year, and Japan, the world's third-largest economy, trudging along at a lumbering pace. 

Quiz: How much do you know about the fiscal cliff?

These new projections are all the more sobering in that they are based on assumptions that Europe's debt crisis won't get much worse and that the U.S. won't go over the "fiscal cliff" of automatic tax hikes and fiscal spending cuts slated for next year.

"If key adverse risks cannot be averted, and especially if the euro area crisis were to intensify significantly, the likely outcome would be considerably weaker, potentially plunging the global economy into deep recession and deflation, with large additional rises in unemployment," said the OECD report. The OECD has 34 member nations, most of them industrialized and in Europe.

The report notes that the global economic recovery slowed markedly over the last year, in part because the problems in the euro area contributed to an unexpectedly strong slowdown in developing economies such as China.

But the outlook for China, Brazil and India -- none of which is a member of the OECD -- looks comparatively brighter as growth is likely to accelerate next year and in 2014. Among major economies, China again is expected to lead the pack, with its gross domestic product, or total economic output, projected to expand 8.5% next year and nearly 9% in 2014 after slowing this year to about 7.5%.

Though far from immune from the troubles in the U.S. and Europe -- which still account for much of the global demand for goods -- China and other major emerging economies have more wherewithal to boost growth than their more-indebted developed counterparts by ramping up government spending and adjusting monetary policies.

Over all, the report notes that fiscal cuts throughout OECD member countries have taken a toll on economic growth, particularly in the Eurozone. Many developed countries also are struggling with financial and economic challenges related to an aging population, large public debts and uncompetitive business costs and practices.

For OECD countries in total, GDP is forecast to grow a sluggish 1.4% next year and 2.3% in 2014.

Quiz: How much do you know about China's economy?

The U.S. economy is projected to do a little better. GDP will expand 2% next year, similar to this year, and then step up to a more solid rate of 2.8% in 2014, said the OECD. The report noted that the U.S. should get a lift from a recovering housing market, increasing consumer spending supported by an improving job market, and a rebound in business investment as policy uncertainties fade.

Still, U.S. economic growth won't come close to keeping up with the rapid advance of developing countries, notably China. Last year, the U.S. accounted for 23% of the global economy, with the Eurozone and China tied for second, each with a 17% share. But in 2030, the OECD estimated, China's share of the global economy will rise to 28%, while the U.S. will slip to No. 2 with 18% of world GDP and the Eurozone down to 12%.


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