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Eurozone warned 'severe recession' looming

Published:Wednesday | May 23, 2012 | 12:00 AM

The 17-country Eurozone risks falling into a "severe recession", the Organisation for Economic Cooperation and Development (OECD) warned on Tuesday, as it called on governments and Europe's central bank to act quickly to keep the slowdown from dragging down the global economy.

OECD Chief Economist Pier Carlo Padoan warned the Eurozone economy could contract by as much as 2 per cent this year, a figure that the Paris-based think tank had laid out as its worst-case scenario in November.

In its twice-yearly global economic outlook, the OECD - which comprises the world's most developed economies - said its average forecast was for the Eurozone economy to shrink 0.1 per cent this year and grow a mere 0.9 per cent in 2013.

"Today we see the situation in the euro area close to the possible downside scenario" in the OECD's November report, "which if materialising could lead to a severe recession in the euro area and with spillovers in the rest of the world," Padoan told reporters before the report's release.

Falling further behind other countries

The report forecasts Europe falling further behind other countries, particularly the United States, whose economy is expected to grow 2.4 per cent this year and 2.6 per cent next.

"There is now a diverging trend between the euro area and the United States (US), where the US is picking up more strongly while the euro area is lagging behind," Padoan said.

Europe itself is increasingly split between a wealthier north continuing to grow and a southern rim that is sliding deeper into recession, the OECD figures show.

Germany, Europe's largest economy, will accelerate to 2 per cent growth next year after 1.2 per cent growth in 2012, while France, the Eurozone's second-largest economy, will expand 1.2 per cent next year after 0.6 per cent growth this year, the OECD said.

Italy's economy, by contrast, will shrink 1.7 per cent this year and 0.4 per cent in 2013, the OECD forecast.

Spain is also set to remain mired in recession, with contraction of 1.6 per cent this year and 0.8 per cent next.

Padoan called on Eurozone leaders to adopt a "growth compact" to promote growth even while reducing deficits. French President François Hollande has made securing such a pact the focus of his European diplomacy in the first weeks of his administration.

So-called eurobonds - debt issued jointly by countries in the currency bloc - could be used to recapitalise banks, Padoan said. He also reiterated his call of six months ago for the ECB to do more to stem Europe's crisis.

The ECB has an "essential" role to play in solving Europe's crisis, Padoan said, both by using its balance sheet firepower to shore up banks and by lowering interest rates.

The ECB should also consider renewing the "unconventional measures" it used last year such as buying up government bonds, "if there is need to cope with contagion problems," Padoan said.

Asian economies will also do better than Europe, the OECD predicted. Japan is forecast to grow 2 per cent this year and slow down to 1.5 per cent in 2013, while China is expected to accelerate from 8.2 per cent to 9.3 per cent.

Despite their growth downgrades for Europe, the OECD's figures are more optimistic than those of the International Monetary Fund (IMF). Last month the IMF predicted Europe's economy would shrink 0.3 per cent this year, with the US expanding 2.1 per cent.

- AP