OECD warns that global recovery is being hobbled by euro crisis

PARIS – The world’s economic recovery will be “hesitant and uneven” next year, with Europe’s debt troubles weighing on more vibrant economies such as the U.S. and in the developing world, a leading international economic body said Tuesday.

Even so, the Organization for Economic Cooperation and Development said it expects the world economy to grow by 3.4 per cent next year, up from 2.9 per cent in 2012.

The projected advance masks big divergences around the world.

The Paris-based agency said it is gloomier about Europe than it was six months ago in its previous update. It now predicts a 0.4 per cent contraction this year for the 17-country eurozone and a 0.1 per cent fall next year. In May, the OECD forecast the eurozone economy to shrink just 0.1 per cent this year and grow 0.9 per cent in 2013.

It also downgraded forecasts for the U.S. economy, predicting two per cent growth next year, compared to 2.6 per cent forecast for 2013 in the last economic outlook in May.

The OECD projects Canada’s economy will grow by 1.5 per cent in the final three months of this year, and advance only 1.8 per cent in 2013.

It says a slowdown in Europe would affect Canada through the trade, financial market and confidence channels, but noted that a bigger factor is the United States, whose economy is better balanced

The OECD also cautioned that growth outside the OECD — which comprises 34 developed economies mostly in North America and Europe – would be slightly faster but crimped by Europe’s troubles.

“A slowdown has surfaced in many emerging market economies, partly reflecting the impact of the recession in Europe,” the report said.

The OECD also warned the U.S. and Europe against cutting spending too sharply and too quickly, saying that could further hurt growth prospects.

“Global prospects remain fragile, with strong downside risks, and are heavily dependent on the speed and decisiveness of policy actions,” it said.

It also warned that unemployment would continue to rise in the eurozone from 11.1 per cent this year to 12 per cent in 2014, but that the rate in the U.S. would gradually decline to 7.5 per cent in 2014.

The glum report came despite signs that the eurozone crisis is ebbing. World markets rose Tuesday hours after Greece’s euro partners and the International Monetary agreed to hand over more bailout cash to the country. There had been fears that Greece might be forced to leave the euro, potentially destabilizing the world economy.

The OECD warned that more needs to be done to link eurozone economies closer together and said progress toward a banking union is “essential” to stabilizing the euro.

It warned that if the European crisis doesn’t stabilize it could plunge the world economy into deep recession.

“The risk of a major contraction cannot be ruled out.”

It also expressed concern about the so-called fiscal cliff in the U.S. — automatic tax increases and steep spending cuts that take effect in January unless President Barack Obama and Congress reach a budget agreement.

“If the fiscal cliff is not avoided, a large negative shock could bring the U.S. and the global economy into recession,” the report said.

It suggested that countries with stronger economies such as Germany and China could provide temporary fiscal stimulus to boost growth.