Europe News

Developed World on 'Knife Edge' as Growth Stalls: Economists

The clouds of gloom hanging over the US, Europe and Japan darkened Thursday with stark outlooks from both influential investment bank Goldman Sachs and the Organisation of Economic Co-Operation and Development (OECD).


Slowing growth figures, and poor results from forward economic indicators such as manufacturing surveys over the summer, have increased speculation that the US and Europe are close to the second part of a double dip recession.

The lack of resolution on the euro zone debt crisis has also added to market uncertainty.

Economists at Goldman Sachs wrote in a note that stress on the banking system and "renewed sovereign stress", particularly in Europe, was the most concerning element of three major factors which could drag the developed world into a new recession.

They said that the US and Europe were on a "knife edge" between recession and growth.

A somber analysis from theon Thursday concluded that economic recovery has come "close to a halt in the major industrialized economies."

"Growth is turning out to be much slower than we thought three months ago, and the risk of hitting patches of negative growth going forward has gone up," OECD chief economist Pier Carlo Padoan told a press conference.

Growth in the G7 economies excluding Japan, which is still in negative growth following the earthquake earlier this year, will remain at an annualized rate of less than 1 percent in the second half of 2011, according to the OECD.

This contrasts with relatively robust growth in countries such as China, which is on track for around 9 percent growth this year.

"After a turbulent summer, it is clearer than ever that the key characteristics of a post-bust recovery (a sluggish and fragile demand recovery alongside continuing downward pressure on interest rates) are firmly in place," the Goldman Sachs analysts wrote.

"So the key short-term question will be whether the latest financial disruptions are enough to prompt fresh deterioration in an economy that was already growing slowly, pushing the US, and perhaps Europe, into another recession."

Recession Not Inevitable

Neither group of analysts believes that recession is inevitable, which should provide some comfort for policymakers trying to steer developed economies through the post-crash period.

"The market now appears to be assessing a somewhat higher probability of a US recession than we do," the Goldman Sachs analysts added.

"But until there are clear signs that the pressures from the data, financial conditions and banking/sovereign stresses are beginning to change, it will be hard for markets not to remain under pressure."

The OECD analysts noted that "serious fiscal and structural reform measures" from a number of OECD members should boost market confidence, but said that "credible steps to curtail debt" must be taken.

This could be a signal to countries such as Italy and Greece, which have yet to decide on key austerity packages.

"The policy imperative is to rebuild confidence,” Padoan said.

President Barack Obama's announcement on jobs later on Thursday could also provide a boost to job recovery in the United States, according to analysts.

Signs of rising unemployment, and increasing numbers of people remaining unemployed in the long term, have added to market nervousness in the past couple of months.

Interest rates have also come into focus, after theEuropean Central Bank started raising rates. The OECD recommended that central banks keep interest rates as low as possible, until signs of recovery appear, and that the process of bank capitalization be accelerated.