OECD Economic Outlook: Things Will Get Worse Before They Get Better

The effects of the fiscal cliff situation in the U.S. are well documented. Businesses are sitting on their hands due to uncertainty, investors are unsure and holding back, and despite strong holiday sales figures many consumers continue to tighten their belts. Real GDP growth for the U.S. in the fourth quarter of 2012 is expected to be just 1.2 percent, a substantial decrease from the 3-percent growth seen in the third quarter.

The report cites problems in Europe as the largest contributors to downside risk. Ongoing issues with Greece’s debt were finally addressed on Monday by the Troika — a coalition comprised of the European Commission, the International Monetary Fund, and the European Central Bank — but Greece’s economy is still expected to contract 4.5 percent in 2013, and a further 1.3 percent in 2014.

Euro-area GDP is expected to contract 0.4 percent in 2012 followed by 0.1 percent contraction in 2013 before seeing modest growth of 1.3 percent in 2014. Germany, with one of Europe’s strongest economies, is only expected to see 0.6 percent GDP growth in 2013, followed by 1.9 percent GDP growth in 2014.

The OECD notes that given the uncertainty involved with the decisions that must be made about the fiscal cliff in the U.S. and debt issues in Greece, central banks should be prepared more for monetary easing. Over-tightening of budgets in keystone economies like Germany and China could backfire. The OECD suggests that temporary stimulus may be necessary to spur growth.

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