PARIS (MNI) – Growth in advanced economies will likely continue to
lose momentum in 3Q, except in the US, before recovering in 4Q, the
chief economist of the Organization for Economic Cooperation and
Development said Thursday.

Since all G7 economies except the US and Canada can expect negative
growth in 3Q, central banks should cut policy rates to zero and expand
asset purchases where inflation is under control, Pier Carlo Padoan
advised.

“With the euro area crisis still the most important risk for the
global economy, further policy action is needed to instill more
confidence in the monetary union,” Padoan said in presenting the OECD’s
near-term GDP projections.

Noting that the European Central Bank’s announced readiness to
intervene in sovereign debt markets had helped to stabilize financial
markets, the economist urged the ECB to corral intra-EMU spreads “within
ranges justified by fundamentals” in order to stem fears of a euro area
break-up. The central bank should also lower its marginal lending rate
and “consider further action to help normalize monetary policy
transmission in vulnerable countries,” he said.

Eurozone governments under market attack have little choice but to
meet official deficit targets, Padoan conceded. “Other countries have
scope to let automatic stabilizers act partly or in full – or even to
take stimulus measures in a few cases if conditions warrant.”

As the EU growth compact is “likely to have only a modest effect,”
it should be flanked with action to deepen the internal market and
structural reforms at the national level, particularly for labor
markets, he urged.

“Further progress towards banking union – including euro-area level
deposit guarantees and a common bank resolution regime – is also
crucial,” Padoan added.

The latest projections see Germany’s GDP contracting at annualized
rates of 0.5% in 3Q and 0.8% in 4Q, though uncertainty here has
increased, Padoan noted. Italy would remain in deep recession with
contractions of 2.9% and 1.4%, while France would emerge from two
quarters of mildly negative growth with a marginal upturn in 4Q.

Uncertainty is also particularly elevated for the UK as regards the
impact of the additional Diamond Jubilee bank holiday in June and the
impact of the Olympic games. The tentative projections are for an
annualized GDP decline of 0.7% in 3Q and a 0.2% upturn in 4Q.

The OECD sees annualized US GDP growth picking up to 2.0% again in
3Q and accelerating to 2.4% in 4Q, despite the recent drop in business
confidence. Canada would lag somewhat with growth of 1.3% and 1.9%,
respectively.

In the US, financial conditions have improved in virtually all
markets, while credit conditions have eased or stabilized, Padoan said.
Still, additional monetary easing “would have to be provided if the
labor market situation were to deteriorate and fiscal tightening proves
excessive in 2013.”

Indeed, current US legislation – “the fiscal cliff” – implies
extremely sharp fiscal tightening in 2013 that would “probably push the
US economy into recession,” he said. “It is urgent that the political
parties agree on detailed medium-term consolidation plans that will
avoid this outcome and reduce uncertainty regarding the fiscal outlook.”

In Japan, the ongoing decline of inflation suggests that the
central bank “should undertake further measures, including an expansion
of the asset purchase program,” Padoan argued. The planned increases of
the consumption tax rate (from 5% to 8% in April 2014 and 10% in October
2015) are “necessary but not sufficient to achieve the government’s
fiscal targets. Top priority should be given to establishing a detailed
and credible consolidation plan,” he said.

In China, inflation has slowed enough so that some of the recent
policy restraint “could be clawed back – possibly accompanied by means
to guard against overheating in housing markets,” he said.

The chief economist also noted “likely durable changes” in global
imbalances, with the Eurozone surplus rising on soft domestic demand and
fiscal consolidation. In the US, an improving oil balance is offsetting
the trade deficit in other areas. Japan’s surplus is falling on rising
energy imports and sluggish exports.

–Paris newsroom +331 4271 5540; email: ssandelius@mni-news.com

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