Europe Slipping Into Mild Recession: OECD

The Eurozone may be entering a recession, warned a grim report by The Organization for Economic Co-operation and Development (OECD).

The Paris-based group said GDP in the Eurozone will shrink by 1 percent in the fourth quarter of 2011, and by another 0.4 percent in the first quarter of next year.

In the absence of unexpected ‘negative events’ (like potential debt defaults in Italy or Spain), the Eurozone economy should eke out a 0.2 percent gain next year.

Britain’s economy is expected to shrink slightly by 0.03 percent this quarter and slip another 0.15 percent in next year’s first quarter. Thereafter, the U.K. could grow by 0.5 percent for the full year in 2012.

The U.S. economy is expected to grow by 1.7 percent this year, and by 2 percent next year.

However, U.S. growth prospects could be compromised by the failure of the U.S. Congress to reach a settlement on how to reduce the federal government’s deficit.

Much tighter fiscal tightening in the U.S. could tip the U.S. economy into a recession that monetary policy can do little to prevent, OECD warned.

Japan, long mired in an economic malaise of deflation, is expected to contract by 0.3 percent in 2011, but bounce back with a 2 percent gain next year.

For the global economy as a whole, OECD downgraded its forecast to 3.8 percent growth this year (from 4.2 percent) and 3.4 percent in 2012 (from 4.6 percent).

“We are concerned that policymakers fail to see the urgency of taking decisive action to tackle the real and growing risks to the global economy,” said OECD Chief Economist Pier Carlo Padoan in a statement.

“We see the U.S. growth recovering only slowly, the euro area entering into mild recession and Japan growing faster because of reconstruction, but this boost is temporary and will fade away.”

Europe remains the key area for worry.

“The euro area crisis remains the key risk to the world economy,” OECD stated.

“Concerns about sovereign debt sustainability are becoming increasingly widespread. If not addressed, recent contagion to countries thought to have relatively solid public finances could massively escalate economic disruption. Pressures on bank funding and balance sheets increase the risk of a credit crunch.”

The OECD further warned: “Another serious downside risk is that no action would be agreed to offset the large degree of fiscal tightening implied by current law in the United States. This could tip the economy into a recession that monetary policy could do little to counter.”

Padoan added: “Prospects only improve if decisive action is taken quickly. In the euro area, the risk of contagion needs to be stemmed through a substantial increase in the capacity of the European Financial Stability Fund, together with a greater ability to call on the European Central Bank’s balance sheet. Much greater firepower must be accompanied by governance reforms to offset the risk of moral hazard.”