x Abu Dhabi, UAETuesday 25 July 2017

OECD warns stimulus needed to avert double-dip in US and Europe

The OECD slashes its growth forecasts for advanced economies as the European Central Bank president warns about increasing "downside risks."

Jean-Claude Trichet, the president of the European Central Bank, said yesterday that risks to the eurozone economy had intensified. Michael Probst / AP Photo
Jean-Claude Trichet, the president of the European Central Bank, said yesterday that risks to the eurozone economy had intensified. Michael Probst / AP Photo

The US and European countries must bolster their economies with stimulus or risk stagnation or the reversal of growth, the Organisation for Economic Co-operation and Development has warned, adding that the second half of the year is looking increasingly bleak.

"If there are prospects for a long-lasting slowdown in activity, countries that have, or put in place, credible fiscal frameworks are in a better position to react and should do so," the international organisation based in Paris said yesterday.

In another sign of an increasingly uncertain economic outlook, Jean-Claude Trichet, the president of the European Central Bank (ECB), said yesterday that risks to the eurozone economy had intensified.

The ECB left interest rates on hold at 1.5 per cent. The move is expected to precede a shift from recent increases to a stable or even lower rate in response to the cooling global economy.

The Bank of England also opted to keep interest rates at a record low of 0.5 per cent for the 30th month in a row. It decided to hold off on increasing its asset-buying programme.

European stocks ebbed slightly after the ECB rate announcement, with the euro also falling against the US dollar.

Markets have been in turmoil in recent weeks as investors worry that the global economy may be spiralling into a repeat of the financial crisis of 2008.

In a reversal of its earlier call for interest rate increases, the OECD said central banks needed to loosen monetary policy further if additional signs of a weakening of growth emerged.

Interest rates in the US will be kept at record lows until 2013, the Federal Reserve decided last month. The OECD cut its expectation for US growth this year to 1.4 per cent from its 2.6 per cent forecast only three months ago.

The combined economies of Germany, France and Italy, the euro-zone's three largest economic powers, would expand by under 1 per cent, less than half the OECD's 2 per cent forecast in May.

The darker OECD forecasts came ahead of a much-anticipated speech to a joint session of Congress by Barack Obama, the US president. He was expected to unveil a US$300 billion (Dh1.1 trillion) stimulus package to help create jobs and kick-start the flagging US economy.

The revisions also preceded a meeting by G7 finance ministers and central bank governors in France today to discuss how to arrest the slowdown.

But Pier Carlo Padoan, the OECD's chief economist, warned that the extent of the growth deceleration might be yet to emerge.

"The impact of the sovereign debt woes in Europe and the US and the associated turbulence in stock markets over the summer have not yet fully fed through into the indicators underpinning the projections," he wrote.

tarnold@thenational.ae