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Global Recession Warning from OECD

Protesters march through Dublin ahead of Ireland's sixth straight austerity budget. Photo / AP
The global economy could slide back into recession if its major problems like US budget standoffs and Europe's lack of jobs are left to fester, a leading international economic body said yesterday.

In its half-yearly update, the Organisation for Economic Cooperation and Development warned that the recovery will be "hesitant and uneven" over the coming two years and that a new major contraction cannot be ruled out.

"The world economy is far from being out of the woods," OECD Secretary-General Angel Gurra said. "Governments must act decisively, using all the tools at their disposal to turn confidence around and boost growth and jobs in the United States, Europe and elsewhere."

Gurria's downbeat assessment came as the OECD published a glum set of predictions. Though the world economy is expected to grow by 3.4 per cent next year, up from 2.9 per cent this, the numbers mask big divergences around the world.

Though countries like China, Brazil and India are expected to see growth pick up, the more established economies remain stuck in a rut.

In particular, the OECD was gloomier about Europe than in its last forecast six months ago, saying "the greatest threats to the world economy" lie in the 17-country eurozone, which continues to grapple with a debt crisis after three years.

A deep global recession is also possible, it said, if the European crisis doesn't stabilise.

The OECD is now predicting a 0.4 per cent contraction this year for the eurozone, worse than May's 0.1 per cent forecast.

For next year, it's forecasting a further 0.1 per cent fall, in contrast to the previous prediction of 0.9 per cent growth.

It also downgraded its forecasts for the US economy and warned that it could be worse if the White House doesn't clinch a deal with lawmakers on the budget. Assuming a deal is thrashed out, the OECD has pencilled in growth of 2 per cent for the US next year, down from a forecast of 2.6 per cent in May.

The OECD 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.

The OECD also warned the US and Europe against cutting spending too quickly, saying that could further hurt growth prospects. It suggested countries such as Germany and China could provide fiscal stimulus to boost growth.

Padoan expressed concern about the so-called fiscal cliff in the US, 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 US and the global economy into recession," Padoan said.

The report argues for "measured" spending cuts and tax increases.

The report 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 US would gradually decline to 7.5 per cent in 2014.

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