OECD fears another world recession as UAE remains rare bright spot

The world could plunge back into recession without decisive action in Europe and the US, the OECD has warned. REUTERS / Sergio Perez

The Organisation for Economic Cooperation and Development yesterday cut global growth forecasts and warned that the world could plunge back into recession without decisive action in the United States and Europe.

It predicted the US economy would expand by just 2 per cent next year, down from 2.6 per cent growth expected six months ago. It also said the euro-zone economy would shrink by 0.1 per cent next year instead of growing by 0.9 per cent.

"The world economy is far from being out of the woods," said the OECD secretary general Angel Gurria. "The US 'fiscal cliff', if it materialises, could tip an already weak economy into recession, while failure to solve the euro area crisis could lead to a major financial shock and global downturn."

The organisation, based in Paris, urged decisive action to avoid a fiscal cliff of more than US$600 billion (Dh2.2 trillion) in automatic tax rises and public spending cuts if a political consensus cannot be reached.

But it said the euro zone was where the greatest risk to the global economy was to be found.

The OECD warning came despite an agreement by European finance ministers to cut the terms of the Greek bailout by suspending interest payments for 10 years and extending the overall repayment period.

"If anything the OECD is still underplaying the risk despite some of the gloomy numbers, said Neil Shearing, the chief emerging markets economist at Capital Economics in London.

It is forecasting weaker-than-expected growth in China, a deep recession in the euro zone and a break-up of the single currency.

"The good news for the Gulf is that it is relatively well placed to weather this period of weakness," said Mr Shearing. "In the near future, the financial and fiscal buffers are such that the GCC economies should be able to get through relatively unscathed. Foreign exchange reserves, sovereign wealth assets are still very high and current accounts still in surplus."

The bleak global outlook contrasts with improving economic sentiment in the Emirates, which is benefiting from a strong oil price and a tourism and trade-led rebound in Dubai, where business leaders gathered at the Global Competitiveness Summit.

"The whole world is chasing jobs right now," said Charles Holliday, the chairman of Bank of America in an interview in Dubai. "If you look at how long we've been at these unemployment levels it is off the charts of anything we've seen since the Great Depression."

Any slowdown in the global economy could hit emerging markets in the form of reduced exports and a potential contraction in the availability of trade finance from European lenders, said the OECD.

But analysts say the biggest impact on Arabian Gulf economies would come from a fall in the price of oil, which was trading close to its lowest level in almost a week in New York yesterday at about $87.80. The measure has lost about 11 per cent this year.

"The Saudi budget will still balance at $85 a barrel and we think the UAE's budget will still balance at $80 a barrel so it is only in places like Bahrain and Oman that you need close to a triple digit oil price to balance the budget," said Mr Shearing.

"But if oil prices were to fall and stay low then the Gulf could find itself in a bit more trouble."

Dubai shares rose 0.15 per cent yesterday while Abu Dhabi lost 0.12 per cent. European markets rose with the Stoxx Europe 600 index gaining 0.31 per cent.