The OECD has slashed its growth forecasts for major developed economies, urging much more aggressive ECB stimulus to ward off the risk of deflation in a subdued euro zone.
The call adds to growing pressure on the euro zone, and the European Central Bank in particular, to boost growth ahead of a meeting of finance ministers and central bankers from the Group of 20 economic powers later this week in Australia.
Updating its growth forecasts for major developed economies, the Organisation for Economic Cooperation and Development projected growth in the euro zone at only 0.8 per cent this year and rising only slightly next year to 1.1 per cent.
That marked a sizeable downgrade from its May Economic Outlook for the euro zone, when the Paris-based organisation forecast growth of 1.2 per cent in 2014 and 1.7 per cent in 2015.
In comparison, the OECD saw the United States’ economy growing 2.1 per cent this year before accelerating to 3.1 per cent in 2015. In May the OECD forecast US growth of 2.6 per cent this year and 3.5 per cent next year. The United States is set to push European countries at the G20 meeting to step up measures to boost demand and economic growth in the face of the risk of deflation, according to a senior official at the U.S. Treasury on Friday.
Quantitative easing?
The OECD said that though euro zone inflation, at a five-year low in August of 0.4 per cent, should strengthen as demand recovers, low levels close to zero raised the risk of deflation. “Given the low-growth outlook and the risk that demand could be further sapped if inflation remains near zero, or even turns negative, the OECD recommends more monetary support for the euro area,” the organisation said in a statement accompanying its forecasts. “Recent actions by the European Central Bank are welcome, but further measures, including quantitative easing, are warranted,” it added.
The ECB recently cut the cost of borrowing to near zero and pledged to buy repackaged debt in an effort to encourage lending to credit-starved companies. However, so far it has shied away from the kind of quantitative easing carried out by counterparts in the United States and Japan, consisting of a huge campaign of buying government and other bonds to lower the cost of borrowing. Turning to Japan, the OECD forecast growth of 0.9 per cent this year and 1.1 per cent next year as the economy recovers after a sales tax hike in April muted consumer demand in the first half.
The OECD trimmed its estimates from May for growth this year of 1.2 per cent and 1.3 per cent in 2015. Outside of the OECD member countries, the group saw growth roughly stable in China at 7.4 per cent this year and 7.3 per cent in 2015, both unchanged from its estimates in May.
Reuters
