OECD: Growth to pick up but money must stay easy

Growth in the world's advanced economies should pick up later this year but central banks need to keep monetary policy accommodative to ensure the recovery remains on track, the OECD said Wednesday. Nevertheless the Organisation for Economic Cooperation and Development in its latest semi-annual Economic Outlook report cut its growth forecasts for most countries, with the notable exception of Japan which has launched a major stimulus programme. "In the absence of adverse events, growth in advanced economies should strengthen gradually after the middle of 2013 and through 2014, helped by on-going support from accommodative monetary policies, improving financial market conditions and a gradual restoration of confidence," said the OECD. Emerging economies, led by China, should continue to grow at rates outperforming developed countries, said the economic policy advisory body for 34 of the world's advanced economies. The OECD trimmed its forecast for the US economy to grow by 0.1 points to 1.9 percent on the impact of automatic spending cuts. "After a sharp bounce-back in activity in the first months of 2013, GDP is now expanding at a moderate pace," said the report, with growth held back by tax increases and the poorly-targeted automatic spending cuts. Nevertheless the OECD expects the US recovery to gather pace and held its 2014 forecast at 2.8 percent. The organisation warned "protracted weakness" in the crisis-hit eurozone "could evolve into stagnation with negative implications for the global economy." In the eurozone "activity is still falling, reflecting ongoing fiscal consolidation, weak confidence and tight credit conditions, especially in the periphery," said the OECD, which now sees a 0.6 percent contraction for this year from 0.1 percent previously. "Growth is projected to pick up only slowly during the second half of 2013 as the pace of fiscal consolidation slows down..." it added, trimming the 2014 forecast to 1.1 percent growth from 1.3 percent. With Japan's government and central bank now pursuing massive fiscal and monetary stimulus programmes, the OECD hiked its 2013 growth forecast to 1.6 percent from 0.7 percent, and sees a 1.4 gain next year. For China "a return to robust, albeit unspectacular, growth appears likely during the rest of this year and the next," said the OECD, but it trimmed its 2013 forecast to 7.8 percent from 8.5 percent. For 2014 it now sees the Chinese economy growing by 8.4 percent instead of 8.9 percent. Overall, "downside risks to the outlook still dominate" even if they have lessened in the past half year. With markets tanking last week on comments by Federal Reserve Chairman Ben Bernanke that the US central bank could scale back its aggressive bond purchase programme, the OECD said that in "the United States, the monetary policy stance needs to remain exceptionally accommodative for some time to come." But given the diminishing benefits from the programme known as quantitative easing and signs of excessive risk taking by some segments of the financial sector, the OECD echoed Bernanke in saying that beginning a gradual reduction may soon be warranted. It however said that Japan's recent quantitative and qualitative monetary easing "is overdue and should help" to overcome debilitating deflation. The OECD still expects Japanese consumer prices to drop by 0.1 percent overall this year, but rise to near the Bank of Japan's 2.0 percent target in 2014. For the eurozone it called for easier monetary conditions, even though the European Central Bank cut its key interest rate by a quarter point this month to an all-time low of 0.50 percent. "Expansion of asset purchases is desirable and different options for such interventions exist..." said the OECD, suggesting purchase of securitised loans of small and medium-sized companies, which would help the flow of credit. In addition to supporting bailed out eurozone members "the ECB could consider buying government bonds of all euro area members on a non-discriminatory basis for monetary policy purposes," said the OECD. Such a move would likely prove very controversial within the eurozone, with Germany's Bundesbank hostile to the ECB buying up government debt. It also urged the ECB to adopt a negative deposit rate, which would discourage banks from stockpiling funds at the central bank as they have been since the crisis began .