OECD sees emerging markets holding back global recovery

Reuters

* U.S. economy seen growing 2.9 percent next year

* OECD says Fed should wind down bond buys in 2014

* ECB should be prepared to fight deflation

By Leigh Thomas

PARIS, Nov 19 (Reuters) - Slowing emerging markets aredragging on the world's economic recovery and advanced countriesare struggling to pick up the slack after years of debt crises,the OECD said on Tuesday, trimming its global growth forecasts.

In its latest snapshot of economic activity, the Paris-basedOrganisation for Economic Cooperation and Development forecastthe world economy would grow 3.6 percent next year.

Though an improvement from the 2.7 percent expected for2013, that was not as fast as the 4.0 percent estimated for 2014in its last twice-yearly Economic Outlook dating from May.

"We've lowered our forecasts for many reasons, but the mostimportant one is the downgrade in growth in the emergingcountries," OECD chief economist Pier Carlo Padoan told Reuters,also citing slower trade and subdued investment.

Padoan said advanced economies would not be able to make upfor the momentum lost by many major emerging economies, hit bycapital outflows triggered by the U.S. Federal Reserve's plansto rein in its exceptional monetary stimulus.

"The U.S, is growing but they have to get their fiscal acttogether," Padoan said. "The euro area is becoming a positivegrowth region again but at very weak rates, and Japan is growingmore but the question is whether this will be sustainable."

The OECD said the Fed should scale down its bond purchasesas activity strengthens next year, forecasting that growth inthe world's biggest economy would reach 2.9 percent in 2014, itsstrongest performance since 2005, after an estimated 1.7 percentthis year.

Despite the improving U.S. outlook, the OECD saw a majorthreat to the global recovery if the United States hit its debtceiling, adding there was a "strong case" to scrap it alltogether.

UNEVEN RECOVERY IN EUROPE

Having been a drag on global growth in recent years, theeuro area was finally seen emerging from two years of recessionto post growth next year of 1.0 percent, down marginally from anestimate of 1.1 percent in May.

Still at risk of flare-ups in the euro zone's debt crisis,the recovery would be uneven among the bloc's members, marked byhigh youth unemployment and weak inflation, the OECD said.

That was ample reason in the OECD's eyes for the EuropeanCentral Bank, which cut its main rates to record lows thismonth, to keep monetary policy at current levels at least untilthe end of 2015, and possibly use more unconventional measuresif deflation emerges.

Growth in regional powerhouse Germany was expected to speedup from an estimated 0.5 percent this year to 1.7 percent nextyear, down slightly from 1.9 percent in the OECD's Mayforecasts. France, the euro zone's second largest economy, wasseen growing 1.0 percent next year, in line with governmentestimates and up from an earlier OECD forecast of 0.8 percent.

Outside the euro area, the OECD sharply revised up itsgrowth forecasts for Britain and predicted the Bank of Englandwould start to raise interest rates in late 2015, whenunemployment is expected to fall to 7 percent.

The OECD now expects growth of 2.4 percent nextyear, compared to its earlier forecast of 1.5 percent.

"Given these projections, slack in labour and productmarkets will narrow and the stance of monetary policy shouldstart to normalise in the last quarter of 2015," the OECD said.

New BoE forecasts last week suggested unemployment would hit7 percent in the second half of 2015, based on current marketinterest rates, but Governor Mark Carney stressed that thiswould not automatically trigger a rate rise.

Propelled by exceptional monetary surplus this year, Japanwas on course for growth of 1.5 percent next year, up from a Mayforecast of 1.4 percent, but down from 1.8 percent in 2013.

Meanwhile, the OECD trimmed its growth forecast for Chinanext year to 8.2 percent, from 8.4 percent previously, but upnonetheless from an estimated 7.7 percent this year.

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