(eca144) OECD warns debt crisis places economic recovery at risk (Refile)

May 26, 2010, 13:56 GMT

Paris - The Organization for Economic Cooperation and Development warned Wednesday that Europe's debt crisis combined with overheating emerging economies were threatening to undercut a stronger-than-expected pickup in world economic growth.

Releasing its twice yearly economic outlook, the Paris-based OECD revised up its growth projections saying it now expected its 31 member states' economies to expand by 2.7 per cent this year and 2.8 per cent in 2011.

But OECD Secretary General Angel Gurria warned: 'This is a critical time for the world economy.'

The organization also said the size of the debt burden faced by many of its members and the recovery meant that the round of emergency fiscal measures aimed shielding economies from recession should be abandoned by next year at the latest.

'Coordinated international efforts prevented the recession from becoming more severe but we continue to face huge challenges,' Gurria said. Now more than ever, we need to maintain co-operation at an international level.

'Many OECD countries need to reconcile support to a still fragile recovery with the need to move to a more sustainable fiscal path,' he added.

Last November, the OECD forecast a growth rate this year of 1.9 per cent for this year and 2.5 per cent next year.

Since then, however, robust growth in the world's leading emerging economies such as China has helped to underpin the economic recovery around the world.

'But at the same time, the risk of overheating and inflation is growing in emerging markets,' said the OECD.

'A boom-bust scenario cannot be ruled out, requiring a further tightening in countries such as China and India,' it warned. 'The knock-on effect would be slower growth in other regions.'

The organization expects the Chinese economy to grow by 11.1 per cent this year before easing back to 9.7 per cent next year with consumer prices posting an annual rise of 2.5 per cent for both years.

The OECD went on to call on China to adopt a more flexible exchange rate saying this could ease some of the pressure on the nation's monetary policy and provide more scope for addressing domestic inflation.

'Instability in sovereign debt markets poses another serious risk,' the OECD said adding that Europe's debt crisis had highlighted the need for the 16-member eurozone to strengthen its institutional framework.

'Bolder measures need to be taken to ensure fiscal discipline', the OECD said in its report.

It also called on its member states to press on with labour market reforms with the aim of bolstering competitiveness.

In the meantime, labour markets are failing to keep pace with the upswing in the international economy.

The number of unemployed has risen by 16 million in OECD countries in the past two years.

The unemployment rate may now be peaking at an average 8.5 per cent cross OECD economies but is likely to fall only slowly in the near term, the organization said.

The OECD also expects growth in both the US and Japan to outpace Europe's economic expansion rate.

While the US is projected to grow by a solid 3.2 per cent this year and next, Japan should expand by 3 per cent and 2 per cent.

However, the eurozone economy is expected to grow by a more modest 1.2 per cent in 2010 before expanding by 1.8 per cent next year.

Inflationary pressures are likely to remain subdued with annual consumer prices in the OECD member states coming in at 1.6 per cent this year and 1.3 per cent in 2011.