OECD's Global Growth Projections Turn Pessimistic

Europe is dragging global growth downward, posing far greater risks than the fiscal cliff.

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Here in the U.S., the economic recovery continues to gain strength. But today comes a reminder of the steep climb awaiting the global economy. The Organisation for Economic Cooperation and Development has downgraded its projections of global economic growth, projecting global GDP climbing 2.9 percent this year and 3.4 percent in 2013. Those figures represent significant cuts from the OECD's May projections of 3.4 and 4.2 percent.

Growth is also projected to be weak for OECD member countries, with the group of 34 advanced economies projected to grow at an anemic 1.4 percent in both 2012 and 2013 alike.

Among the factors dragging growth down is the Euro area, with the Paris-based think tank predicting sustained negative growth at -0.4 percent in 2012 and -0.1 in 2013, before righting itself and climbing to a weak 1.3 percent in 2014. U.S. growth will be markedly better than Europe's, at 2.2 percent for this year, slowing to 2.0 percent in 2013 and then rising to 2.8 percent in 2014.

Though both the Euro area and the U.S. represent significant threats to the global economy with their respective crises, the European debt crisis and looming U.S. fiscal cliff, OECD experts say the two threats are not equal.

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"We believe that the Euro area remains the largest risk to the global economy," said OECD Chief Economist and Deputy Secretary-General Pier Carlo Padoan in a Monday call with reporters, saying that Europe's problems could create "recessionary waves" that would "spill over into the rest of the global economy, including the United States, but also the rest of the OECD."

The OECD's U.S. projections assume that American lawmakers will manage to avoid going over the fiscal cliff. Allowing the scheduled spending cuts and tax increases to take effect would likely drag the U.S. into a recession, as the Congressional Budget Office projects. However, Padoan added that the problems created by the fiscal cliff wouldn't have the same kind of global impact as a Euro area financial event. Fears about bank solvency, government debt levels, and a breakup of the monetary union, the E.U. crisis is creating international uncertainty on several levels.

"The two events would have very large consequences, but the Euro area would be larger," he said. Padoan was quick to caution, however, that there is now the possibility of two major global economic shocks in rapid succession. "Having said that, of course, one can imagine a very bad scenario where both events take place. In that case, you probably would have cumulative impacts."

A simultaneous slowdown and recession in both the E.U. and U.S. economies — the two largest economies in the world — would without a doubt create significant problems in the global economy.

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The two crises are vastly different: one involves managing revenues and spending within one country, and the other involves coordinating a monetary union across an entire continent. However, Padoan said that the two do have one key commonality.

"In both cases, there is a possibility for policymakers to take decisive action which would avoid the worst but also boost confidence. And so this is a common message we would like to share," he said.

It appears policymakers are open to taking decisive actions. In the U.S., lawmakers are increasingly showing signs that they could reach a bipartisan deal by Dec. 31.

In Europe, finance ministers, the IMF, and the European Central Bank have also agreed to give Greece more help in reducing its massive debt load, with a package that will cut the country's debt by more than 40 billion euros.

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  • Danielle Kurtzleben is a business and economics reporter for U.S. News & World Report. Connect with her on Twitter @titonka or via E-mail at dkurtzleben@usnews.com.