OECD cuts G7 growth forecasts on eurozone crisis

The economic outlook for the eurozone has deteriorated in recent months as the crisis has spread from the region's periphery to its core – with a knock-on effect for growth in major developed countries around the world, the Organisation for Economic Cooperation and Development reported today.

The OECD, a think-tank bringing together 34 advanced economies, said the euro area's three largest economies – Germany, France and Italy – would see their economies decline by an annualised rate of 1 per cent on average between July and September, and by 0.7 per cent from October to December.

"Our forecast shows that the economic outlook has weakened significantly since last spring," said Pier Carlo Padoan, chief economist at the Paris-based organisation. "The slowdown will persist if leaders fail to address the main cause of this deterioration, which is the continuing crisis in the eurozone."

The eurozone is on the brink of a new recession, with statistics agency Eurostat confirming today that gross domestic product in the region declined by 0.2 per cent in the second quarter, between April and June. Padoan said: "Resolving the euro area's banking, fiscal and competitiveness problems is still the key to recovery."

In a press statement the OECD said: "The continuing euro area crisis is dampening global confidence, weakening trade and employment and slowing economic growth." It predicted that the drag from the eurozone would mean the G7 major developed economies – Germany, France, Italy, the United Kingdom, the United States, Canada and Japan – would grow overall by just 1.4 per cent this year.

Individually, Germany's expected growth rate for this year was cut from 1.2 per cent to 0.8 per cent, and France's from 0.6 per cent to 0.1 per cent. The OECD said it expected Italy's economy to decline by 2.4 per cent, rather than the 1.7 per cent contraction previously projected. The outlook for the US was markedly better, with a predicted growth rate of 2.3 per cent, but the UK was expected to decline by 0.7 per cent overall this year.

"A number of downside risks threaten the outlook, including the potential for further increases to already high oil prices, excessive fiscal contraction, notably in the US in 2013, and further declines in consumer confidence linked to persistent unemployment," Padoan said.

Ahead of the European Central Bank's expected announcement later on Thursday of a bond-buying plan designed to ease borrowing costs for struggling eurozone countries, the OECD also called for a further cut to interest rates. "Where activity is weak and inflation under control, policy rates should be cut if they are still above zero," it advised. The ECB's main interest rate currently stands at 0.75 per cent.

In its assessment, the OECD said it expected unemployment to rise beyond its current levels because of the weak growth projections. At the last count the eurozone jobless rate stood at 11.3 per cent, according to Eurostat, meaning there were more than 18 million people out of work in the 17-nation single currency bloc in July.

At a 'Jobs for Europe' conference organised by the European Commission, its president José Manuel Barroso said solving the jobs crisis was "one of the fundamental elements in resolving the broader European crisis". He described employment policy as a key part of the commission's drive towards "true economic and monetary union", adding: "We do not want social cohesion, social rights, to be put into question or diminished in Europe."