(MoneyWatch) The global economy is gradually recovering, but gains are uneven across different regions and remain vulnerable to the festering debt crisis in Europe, according to a forum of the world's largest economies.
The Organisation for Economic Cooperation and Development projects in a new report that GDP growth across the group's 34 member countries will slow this year to 1.6 percent, down from 1.8 percent in 2011, before recovering to 2.2 percent in 2013. But while the group expects economic growth in the U.S. to rise 2.4 percent in 2012 and 2.6 percent in 2013, Europe's overall GDP this year is forecast to shrink 0.1 percent.
"The crisis in the eurozone remains the single biggest downside risk facing the global outlook," said OECD chief economist Pier Carlo Padoan in a statement.
Increasing personal consumption and moderate job growth is boosting incomes in the U.S., although rising energy prices have muted those positive effects. Americans also continue to reduce their debt, pinching spending and constraining growth. Investment by private businesses in 2012 has declined slightly from last year. On a more positive note for the economy, inflation remains in check and is not expected to rise so long as the Federal Reserve maintains its policy of supporting low interest rates for the foreseeable future.
One key factor that has helped the U.S. economy is its avoidance of the major government spending cuts and tax hikes that many European countries have adopted since the 2008 financial crisis. But the expiration of tax cuts and unemployment benefits, coupled with automatic spending cuts negotiated between Democrats and Republicans as part of a budget compromise last year, could derail the U.S. recovery, the OECD warns.
"Although fiscal consolidation is needed to put government debt on a sustainable path, current legislation implies a very sharp fiscal retrenchment in fiscal-year 2013 that would be badly timed given the still-fragile state of the economy," according to the OECD.
If the U.S. is slowly healing, European economies have stagnated since mid-2011, the group concluded in underscoring how the "austerity" policies implemented across the EU in recent years have weighed on growth. It expects unemployment to increase across the region as a result of the ongoing sovereign-debt crisis, sapping consumer and business confidence.
The high level of government debt in many European countries does warrant a push to reduce spending, but that process should occur gradually and over the long term, according to the report. The OECD said that nations moving in concert to slash their budgets is acting as a "significant" drag on growth.a "severe recession" unless it corrects course, Padoan said in a press conference to discuss the group's twice-yearly Economic Outlook.
Another obstacle to recovery in Europe is the imbalance between the region's stronger economies, including Germany, the Netherlands, and Scandinavian countries, and ailing "periphery" economies such as Greece, Portugal, and Ireland. A willingness by healthier countries to allow wages and inflation to rise would promote growth in weaker nations by making their exports more competitive, the OECD said. To that end, Padoan urged eurozone leaders to adopt a "growth compact" to speed growth and ease deficits.
Growth in Germany, Europe's largest economy, is forecast to hit 1.2 percent this year and 2 percent in 2012. By contrast, Italy's economy is projected to contract 1.7 percent this year and shrink another 0.4 percent in 2013, while Spain also is stuck in a recession that has pushed up unemployment to more than 24 percent.
Along with moving to gradually reduce government debt across Europe and level the economic playing ground, the group advocates several specific prescriptions to boost growth in the region:
- Comprehensive structural reforms in areas such as education, innovation, competition, and "green" growth
- Enhancing the firewall to prevent contagion of the eurozone financial crisis
- Boosting the European single market to support additional economic activity
- Increasing European Investment Bank funding for infrastructure projects
- Making better use of European Central Bank balance sheets
Yet such policies remain politically sensitive, with German Chancellor Angela Merkel particularly resistant to efforts to jump-start growth in Europe by increasing spending. It also remains unclear if the EU will succeed in stemming investor panic that could follow a move by Greece to exit the eurozone.