Business/Finance

Recovery in developed economies gathering pace

Wednesday, May 26, 2010

Economic recovery in the world's richest countries is accelerating thanks to a "substantial" rebound in trade and growth in Asia, but austerity measures are needed to reduce deficits - as Europe's debt crisis proves, a leading agency said Wednesday.

The Organization for Economic Cooperation and Development, a watchdog for 31 of the world's most developed economies, said that serious risks including Europe's sovereign debt crisis and a possible boom-bust scenario in emerging markets such as Brazil, India and China still threaten what it calls a "relatively auspicious" economic environment.

"The period of significant financial instability that began in August 2007 is not yet over," the OECD warned in its latest biannual Economic Outlook.

The Paris-based group also raised its forecasts for economic growth in its member countries - which include the U.S., Japan, Germany and the United Kingdom - to 2.7 percent this year, up from its forecast of 1.9 percent last November.

The OECD lifted its forecasts for Japan, the United States and the eurozone countries, but Japan and the U.S. are still expected to outpace Europe, the report said.

"The outlook has really improved in this short period" since the OECD's last forecast, Secretary-General Angel Gurria said in a news conference at the organization's headquarters.

But the OECD chief urged member countries to pursue "fiscal consolidation" - reducing their deficits through spending cuts and a clampdown on tax evasion - which he said was "imperative" to make the OECD's positive growth outlook a reality.

The OECD publishes its economic outlook twice a year, although it updated some 2010 forecasts in an interim assessment published in April.

Europe's response to its sovereign debt crisis - the latest chapter in the global financial and economic turmoil that began three years ago - has been "prompt and massive," the OECD said, but has failed to settle the currency bloc's "underlying weaknesses."

The OECD called for "bolder measures" - up to and including an effective fiscal union - among eurozone countries in order to "dissipate doubts about the long-term viability of the monetary union."

"Bolder measures need to be taken to ensure fiscal discipline, along a continuum that ranges from stronger surveillance and more effective sanctions for noncompliance, to external auditing of national budgets all the way to de facto fiscal union," the OECD said.

Gurria stressed that the current turbulence in Europe is part of the same crisis that began in the U.S. in 2007. "This is the same crisis, it's a continuum," Gurria said, adding that the next challenge after slashing the massive debt loads countries took on save the banking industry and combat recession is unemployment.

Unemployment in the OECD area is forecast to peak at 8.5 percent by the middle of this year, Gurria said. It will remain stuck at over 8 percent next year however, as companies in Japan and Europe are expected to increase working hours of employees rather than hire new workers.

The U.S. economy has been boosted by stimulus measures, improving financial conditions, demand from the fast-growing non-OECD economies of Asia - especially China - and the stabilization of the housing market.

The employment outlook in the United States also looks better than in Europe and Japan. The OECD predicted that unemployment will come down to 8.9 percent next year from a high of 9.7 percent this year, as unlike their counterparts in Europe and Japan, U.S. businesses shed large numbers of employees in the downturn and should "rehire relatively strongly" in the upturn, the OECD said.

The OECD predicts the U.S. economy will expand at a rate of 3.2 percent in 2010, up from a November forecast of 2.5 percent.

In Europe, the economies of the 16 countries sharing the euro are now expected to grow by 1.2 percent this year compared to a November forecast of 0.9 percent.

Unemployment will peak at 10.1 this year in the eurozone and stay stubbornly at that level in 2011, sapping the strength of the recovery, the OECD said.

The recent weakness in the euro versus the dollar will benefit European growth, OECD chief economist Pier Carlo Padoan said. "I would not be concerned if we see a further decline in the euro," Padoan said, "This would be a welcome addition to external demand for the euro area."

Padoan added that "the global economy needs some rebalancing in exchange rates," saying that the euro has been overvalued versus the dollar and China's currency undervalued.

Japan's economy will grow by 3 percent this year compared with the November forecast of 1.8 percent, the report said.

(Copyright ©2014 by The Associated Press. All Rights Reserved.)

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