OECD cuts global economic forecasts

The OECD slashed its global growth forecasts today, warning that the debt crisis in the recession-hit euro zone is the greatest threat to the world economy.

The Organisation for Economic Cooperation and Development urged central banks to prepare for more exceptional monetary easing if politicians fail to come up with credible answers to the debt crisis.

In its twice-yearly Economic Outlook, the OECD forecast that the global economy would grow 2.9 percent this year before expanding 3.4 percent in 2013. The estimate marked a sharp downgrade since the OECD last estimated a rate in May of 3.4 percent for this year and 4.2 percent in 2013.

The euro zone is facing two years of economic contraction, while the United States risks a recession if lawmakers there fail to agree a deal to avoid a combination of tax hikes and budget cuts that will otherwise go into effect next year.

Providing the deadlock in Washington is overcome, the world's biggest economy will grow 2.0 percent next year, the OECD estimated, cutting its forecast from 2.6 percent in May.

"The US fiscal cliff is a very important source of concern, but the greatest downside risk remains the euro zone," OECD chief economist Pier Carlo Padoan told reporters.

"The reason for that is not only recession, but also the fact that different negative policy (feedback) loops between sovereign debt, the banking situation and exit risks remain. So the overall zone remains in a state of fragility."

Cutting its estimates, the OECD forecast that the euro zone economy would contract 0.4 percent this year and another 0.1 percent next year, only returning to growth in 2014 with a rate of 1.3 percent.

The OECD warned that diverging financing conditions within the European monetary union threaten to pull it apart if policymakers fail to get a grip on the debt crisis.

"The euro area, which is witnessing significant fragmentation pressures, could be in danger," Padoan wrote in a foreword to the outlook, urging politicians to overcome deadlock over a single European Central Bank-led bank supervisor.

Given the weakness of the global economic outlook, the OECD warned governments against being too zealous in their belt-tightening efforts and recommended that Germany and China even pursue temporary stimulus spending to revive growth.