OECD Cites Possible Euro Breakup in Lowering Global Growth Projections

The Organization for Economic Cooperation and Development has warned that the euro zone and the U.K. could be entering another recession. In cutting its global growth forecast, the OECD said growing doubts about the survival of Europe’s monetary union has caused economic growth to stall and represents the main risk to the world economy.

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The 34 OECD nations are expected to grow 1.9% this year and 1.6% next year, down from 2.3% and 2.8% as predicted in May, according to the Paris-based Organization’s biannual global economic outlook, released today. In a separate report, Morgan Stanley (NYSE:MS) also cut its forecast for 2012 global growth.

“Skepticism has grown that euro-area policy makers can deal effectively with the key challenges they face,” OECD Chief Economist Pier Carlo Padoan wrote in the report. Serious downside risks remain, linked to “loss of confidence in sovereign-debt markets and the monetary union itself.”

The OECD is the first major government body to remark upon the possibility of a euro breakup and reflect the shift in the debt crisis from the region’s periphery to its core. Germany and France, Europe’s first- and second-largest economies, both saw bond yields climb last week  as a German bond auction failed to get bids for 35% of the 10-year debt on offer.

“The euro-area crisis represents the key risk to the world economy,” reads the OECD report. “Contagion has entered a new phase and spread beyond euro-area countries normally seen as fiscally vulnerable, suggesting that fiscal concerns are no longer the only driving force behind contagion.”

Yields on German bunds rose five basis points, or 0.05%, to 2.31% at 10:54 a.m. today in London. They earlier reached 2.34%, their highest level since August 16.

The OECD, which advises members on policy, said the European Central Bank should cut interest rates and expand its balance sheet, while the European Financial Stability Facility should also be strengthened if it is to combat the debt crisis.

“Decisive policies and the appropriate institutional responses will have to be put in place to ensure smooth financing at reasonable interest rates for sovereigns,” reads the report. “This calls for rapid, credible and substantial increases in the capacity of the EFSF together with or including greater use of the ECB balance sheet.” Germany and the ECB have resisted calls for an expansion of the central bank’s bond-buying program, despite numerous calls for the lender to do more to calm government-bond markets.

The euro zone itself is already in a “mild” recession, according to the OECD, with the 17-nation region set to register growth of 1.6% this year and just 0.2% in 2012. Gross domestic product will expand by 1.4% in 2013. Meanwhile, the U.S. economy is expected to grow 1.7% this year and 2% next year. Japan is expected to shrink 0.3% this year before growing 2% in 2012 and 1.6% in 2013, the OECD said.

Today, Morgan Stanley downwardly revised its global growth estimate to 3.5% in 2012, compared to an earlier estimate of 3.8% publishing in August, citing an “anemic” expansion in the U.S. and a recession in Europe. It predicts global GDP will grow 3.9% in 2013.

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The OECD also cautioned that fiscal tightening in the U.S. should not be so restricting as to forestall its “fragile” economic recovery, and called for fiscal support to be implemented should the economy weaken. The OECD also said the Chinese economy may “slow more than projected against the backdrop of the tightening of monetary conditions.”

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