Slowing emerging economies, US budget fears drag on global growth, despite Europe improvement

PARIS – Global growth is expected to lag this year and next, but for the first time in a long time, it’s not all Europe’s fault.

That’s the view of a leading international economic body, which said Tuesday that a slowdown in emerging economies and the potential for another U.S. budget crisis are the main sources of concern for the global.

In its half-yearly forecast, the Organization for Economic Cooperation and Development lowered its forecast for global growth to 2.7 per cent for this year and 3.6 per cent for next. In May, it had predicted 3.1 per cent and 4 per cent growth, respectively.

Just as the economy of the 17-country eurozone is emerging from its longest-ever recession brought on by a debt crisis, other economies are coming off the boil.

Emerging markets, which have helped shore up global growth in recent years, are beginning to lag, partially over fears that a pickup in the U.S. economy will spell the end of cheap credit. The U.S. Federal Reserve has pumped trillions of dollars into the U.S. economy in an attempt to keep a lid on market interest rates and get money flowing. The stimulus, which has been going on in various guises for years, has also helped sustain growth in emerging countries. Now businesses there are bracing themselves for the end of the stimulus.

The OECD also cautioned about the impact of another damaging fight over the U.S. budget. A little over a month ago, the U.S. narrowly avoided technically defaulting on some of its debts following a protracted and often dysfunctional battle in Congress.

“Brinkmanship over fiscal policy in the United States remains a key risk and uncertainty,” Pier Carlo Padoan, the OECD’s chief economist, wrote in a commentary accompanying the report.

The OECD recommended that the U.S. scrap its policy of capping borrowing with a debt ceiling and instead come up with a more reasoned plan to reduce debt.

The eurozone is also beginning to improve, the OECD said, although risks remain. It predicted that overall, the eurozone will shrink 0.4 per cent this year, as compared with the 0.6 per cent slide forecast in May.

But the report warned that the recovery is uneven, and unemployment won’t begin to fall — from very high levels — until next year.