The Organization for Economic Cooperation and Development (OECD) has cut its economic growth forecasts for large developed economies, including U.S., and claimed the continued weakness of the recovery demonstrated the need for significant changes in economic policy, the Wall Street Journal reports.
The Paris-based research institution warned that economic growth could get even more disappointing in 2014 and 2015. In a partial update to its twice-yearly forecasts for economic growth, the OECD cut its 2014 projections for each member of the Group of Seven largest developed economies. It said it now expects the U.S. economy to expand 2.1% this year, having forecast growth of 2.6% in May, while it expects the eurozone economy to expand by just 0.8%, having forecast growth of 1.2% in May. The research body reserved its biggest recalibration for Italy, and now expects that nation's economy to contract by 0.4% in 2014, having estimated it would grow by 0.5% in May.
The main influencing risk factors are those, including conflicts in Ukraine and the Middle East, the Scottish independence referendum, and the possibility of major shifts in financial flows and sharp exchange-rate movements, since investors are preparing themselves for a tightening of U.S. monetary policy that is expected next year. The euro zone is again the most disturbing danger to global growth prospects, with very low inflation rates holding back demand and employment, and increasing the risk of a slip into deflation, or a period of self-reinforcing price falls.
"The global recovery from the crisis has been inadequate in several ways," the OECD said. "Economic slack has persisted, potential growth has slowed, and inequality has risen. Meanwhile, external imbalances and threats to financial stability have remained."
Among large developing economies, the OECD left its growth forecasts for China unchanged, raised its forecasts for India and cut its forecasts for Brazil. It also left its forecast for Canada unchanged and slightly raised its forecast
for the U.K. It still expects economic growth to pick up in most
countries next year.
The OECD said monetary policies in the major economies are set to diverge, with the U.S. Federal Reserve and the Bank of England ending their easing policies at a time when the European Central Bank may have to provide even more stimulus. Earlier this month, the ECB announced new cuts to its key interest rates along with two bond-buying programs, having cut rates in June and announced a program of cheap loans for eurozone banks.
But the OECD said that may not be enough to boost growth and inflation, and called on the ECB to launch a program of large scale asset purchases, including government bonds.
"Recent ECB action is welcome but further measures, including quantitative easing, are warranted," said Rintaro Tamaki, the OECD's acting chief economist.
The institution added the Bank of Japan may also need to provide more stimulus to accompany a second increase in the sales tax planned for 2015.
But governments also need to play their part, the research body said, listing a number of "structural reforms that are needed to get the global economy growing at a fast enough pace to quickly reduce high levels of unemployment. They include increased investment in infrastructure in the U.S., the completion of a banking union in the eurozone, tax simplification in India and Brazil, and a reduction in taxes on employment in France.
"The continued failure of the global economy to generate strong, balanced and inclusive growth underlines the urgency of ambitious reform efforts," the OECD said.
This Thursday Scotland holds a referendum on whether to end or continue with its 307-year membership of the U.K. With opinion polls pointing to a very close vote, the OECD made it clear it would prefer the union to be maintained.
"We clearly believe that better together is the way to go," said OECD Secretary General Ángel Gurria in a news conference. "The U.K. is an important member of OECD, and we would like to see it remain together, we think that would be best for all its component parts."
