OECD warns of European recession

World trade growth has slowed significantly according to the OECD

The OECD has warned that the eurozone and UK could be entering a recession, and has cut its global growth forecast.

The OECD said the eurozone would shrink in the fourth quarter by 1%, and by 0.4% in the first quarter of 2012.

For the UK, the OECD's predictions are a 0.03% contraction this quarter, and a further 0.15% next.

Separately, Bank of England governor Mervyn King told a committee of MPs that growth would be "flat or close to zero" over the next six months.

He told the Treasury Select Committee that he had no yet read the OECD report, but warned: "The outlook for output growth in the near term is considerably weaker than even three months ago."

The OECD's report also revised down its forecast for global economic growth to 3.8% this year and 3.4% next year.

Events

A "negative event" in the eurozone, such as a default by Italy or Spain, could even cause a global contraction, the OECD said.

The Organisation for Economic Cooperation and Development represents wealthy countries such as those within the eurozone, the US and Japan.

"More than usual, world economic prospects depend on events," it warned.

In the absence of such an event, the OECD's Economic Outlook predicted positive growth in the eurozone for 2012 as a whole of 0.2%, despite a shallow recession in the period September 2011 to March 2012.

It recommended the European Central Bank should cut rates and increase its purchases of government bonds in order to to limit the cost of borrowing for governments.

"What we see now is contagion rising and hitting probably Germany as well," said OECD chief economist Pier Carlo Padoan

"So the first thing, the absolute priority, is to stop that and in the immediate the only actor that can do that is the ECB," he added.

In the UK, growth is predicted to be faster than the eurozone next year, at 0.5%, the OECD said.

UK risks

The Paris based group also predicted rising unemployment in the UK, with the jobless rate increasing from 8.1% in 2011 to 9.1% by 2013 even as the economy recovers.

Whilst supporting plans to cut the deficit, the report recommended that the Bank of England should increase further its quantitative easing programme to a total of £400bn to increase the flow of credit to the economy.

The government said the low growth forecast was the result of the eurozone crisis.

"It's very clear that as an open economy, we are going to be affected by what happens on our doorstep, in the eurozone," said a spokesperson.

The opposition called on the government to slow down its cuts to the deficit.

"We need action and a change of course now to boost jobs and growth and get the deficit down in a balanced way," said the shadow chancellor, Ed Balls.

Seeking growth

The OECD warned that a further deterioration in the UK economy could require changes in policy.

"Short-term fiscal support would be warranted, for example by easing up on the planned cuts in public investment, temporarily slowing consolidation," it said.

Another economic forecast is expected tomorrow from the government's independent Office of Budget Responsibility.

Economists have warned there are currently few reasons to be optimistic about the UK economy.

"It is hard to see where any growth next year will come from," said David Tinsley, UK economist at BNP Paribas.

Trade slowdown

In the US, the economy is expected to continue to grow by 1.7% this year and 2% in 2012.

However, a failure by the US Congress to agree a more balanced way to cut the federal government's deficit could also see the US economy shrinking, the OECD warned, as in the absence of a deal harsh government spending cuts and tax rises are due to take place over the next 15 months.

"Much tighter fiscal tightening in the US could tip the US economy into a recession that monetary policy can do little to prevent," it warned.

Global trade growth is also slowing according to the group.

Trade will have risen by 6.7% by the end of this year, it predicted, but will slow to 4.8% during 2012.

"International trade growth has weakened significantly. Contrary to what was expected earlier this year, the global economy is not out of the woods," the report warned.

The OECD did, however, predict a pick-up in Japan's economy, following this year's earthquake and tsunami.

It said Japan would grow by 2% in 2012, after a contraction of 0.3% in 2011.