OECD cuts Eurozone, Emerging Europe growth forecasts

By bne IntelliNews May 30, 2013

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In further evidence that Emerging Europe faces a long, hard slog to escape from its current doldrums, the Organisation for Economic Cooperation and Development (OECD) has cut its growth forecasts for the Eurozone and called on the European Central Bank (ECB) to consider doing more to boost growth.

In its biannual "Economic Outlook" released May 29, the OECD forecast the world economy would grow 3.1% this year before accelerating to 4% in 2014, but that this picture would vary across regions and countries. The US economy is projected to grow by 1.9% this year and by 2.8% in 2014. But GDP in the Eurozone is expected to decline by 0.6% this year, worse than the 0.1% contraction it was forecasting just six months ago, and then rebound by 1.1% in 2014. Japanese GDP is expected to grow by 1.6% in 2013 and 1.4% in 2014.

"The global economy is strengthening gradually, but the upturn remains weak and uneven," said OECD Secretary-General Angel Gurria.

The OECD warned that prolonged economic weakness in Europe could damage the global economy, as it "could evolve into stagnation." It blamed continuing austerity measures, weak confidence and tight credit conditions. It hinted that the ECB might want to consider expanding quantitative easing (QE) as a measure to encourage stronger growth.

Problems in the Eurozone inevitably spell trouble for Emerging Europe, the countries of which rely on the western markets for their exports. The OECD further cut its growth outlook for most of the seven countries in Emerging Europe that are members, but said a moderate turnaround in those economies was on the way thanks to expected improvement in the Eurozone.

The OECD cut its 2013 growth outlook for Russia to 2.3% from 3.8% following a slowdown at the turn of the year in key gas and oil exports. Next year, it sees growth of 3.6%, below the 4.0% forecast in December. Inflation is seen falling from February's 7.3% peak. "Inflation should slow down towards the central bank target range (of 5-6%) as effects of bad harvest and administrative price increase fade. This will increase growth of real household incomes and consumption," it said.

The region's other major economy, Turkey, is expected to see growth above 3% this year and above 4.5% next year - growth will be even higher if the recovery in the Eurozone is faster than predicted. "Inflation and the current account deficit both remain above comfort levels, however," it noted.

In Central Europe, Poland's growth forecasts for this year and next year were cut to 0.9% and 2.2% from 1.6% and 2.5%, on the back of a weak labour market and slackening demand. The OECD cut the Czech GDP forecast to -1.0% and 1.3% for 2013 and 2014, from a previous 0.8% and 2.4%. Slovakia's growth forecasts were cut to 0.8% this year and 2.0% in 2014, from 2.0% and 3.4% respectively.

Hungary, on the other hand, had its growth forecast raised to 0.5% this year and 1.3% next year, from a previous -0.1% and 1.2%. The OECD couldn't resist a dig at the populist government of PM Viktor Orban, calling for the "phasing out distortive taxes on banks and non-tradeable sectors", and warning of the potential dangers of easy monetary policy, including further rate cuts and a scheme to lend banks at 0% to boost small business lending. "While these steps could help to revive bank lending, which has been shrinking since 2008, monetary easing also risks currency depreciation, which could prove difficult to handle in view of the large debts denominated in foreign currencies, and lead to higher inflation," the OECD said.

The country deemed most likely to require an international bailout, Slovenia, also saw its GDP forecasts cut, with the economy expected to shrink by 2.3% this year and just a 0.1% expansion next year. Bank restructuring is key to restoring confidence and maintaining access to international markets, the OECD said.

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