Business

OECD sees risk of 'stagflation' for global recovery

Fire at the Ras Lanuf oil terminal in Libya
Image caption Rising oil prices due to continued turmoil in the Middle East pose a major threat, the OECD says

The global economic recovery still faces many risks, which could lead to "stagflation", the OECD has said in its latest economic outlook.

World growth is forecast to be 4.2% this year, down from 4.9% last year, before rising to 4.6% in 2012.

But the OECD said rising prices of oil and other commodities, the damage from Japan's earthquake, and a sharp slowdown in China could derail things.

In some countries this could lead to stagnant growth and high inflation.

Chief amongst the risks was a further rise in oil prices due to the political instability in the Middle East, said the Organisation for Economic Co-operation and Development (OECD) in its report.

'Political stalemate'

Given the continued fragility of government finances in many countries, the organisation warned that if any of these risks materialised, they could lead to further disruption in the financial markets.

In a veiled reference to the impasse in Congress over the US federal debt ceiling, the report called for "unblocking political stalemate" in order for governments to credibly commit to reining in their budget deficits.

However, provided commodity prices do stabilise, the OECD said that the effect of recent price rises and of the devastating Japanese earthquake on world economic growth were expected to fade, with the recovery picking up by the second half of the year.

Indeed, the OECD economists pointed to the possibility of strong pent-up demand for durable goods among Western consumers, and for capital equipment by firms, as a reason why growth may take off more rapidly than forecast.

For the UK, the organisation predicted sub-par growth of just 1.4% this year, rising to 1.8% in 2012, while unemployment is expected to remain stubbornly above 8% over the next two years.

The report voiced support again for the government's austerity programme, which "strikes the right balance", while calling on the Bank of England to begin raising rates this year.

Other policies it recommended for the UK included the elimination of VAT exemptions in order to fund higher infrastructure spending, as well as a further rise in the retirement age.

The OECD is an association of 34 developed countries, including the US, Japan and European countries, that sponsors economic reform and trade.

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