U.S. Fiscal Cliff May Pull Global Economy Deep Into Recession: OECD

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If Congress fails to prevent the U.S. fiscal cliff, it will plunge the global economy back into recession, said the Organization of Economic Cooperation and Development in its latest Economic Outlook report released today. However, it added that the European economic crisis remains the biggest threat to the world economy. Headquartered in Paris, OECD represents the world’s richest 34 countries.

U.S. Fiscal Cliff May Pull Global Economy Deep Into Recession: OECD

“If the fiscal cliff is not avoided, a large negative shock could bring the U.S. and the global economy into recession,” said OECD Secretary-General Angel Gurría. The report comes at a time when the Obama Administration gears up to negotiate the budget agreement with Republicans in Congress. OECD asked the United States to implement “smooth” spending curbs, tax increases, and a higher debt ceiling in the long run.

What’s this fiscal cliff? Well, it’s the $607 billion in tax increases and spending cuts that are scheduled to be effective early next year, unless the U.S. Congress prevents it. On November 16, Treasury Secretary Timothy Geithner said that the deadlock can possibly be resolved in several weeks, but the uncertainty it has already created is affecting consumer confidence and the economy.

The U.S. federal budget deficit is estimated to be $1.04 trillion in 2013, the fifth consecutive year of exceeding $1 trillion. With the fiscal cliff, the government wants to reduce the federal deficit to $200 billion by 2022.

OECD also said that it is “urgent” to resolve the European debt crisis. “In the euro area, where the greatest threats to the world economy remain, progress in adjustment and in strengthening institutions has been significant over the recent past,” the OECD report said. “However, challenging fiscal sustainability conditions in some countries risk sparking a chain of events that could considerably harm activity in the monetary union and push the global economy into recession.”

The organization also urged Federal Reserve to be prepared to enlarge its third quantitative easing if the U.S. economic deterioration turns out worse than expected. The labor market is recovering very slowly, and OECD estimates unemployment rates in the United States to decline to 7.5 percent by the end of 2014.

Th report says that the U.S. economy would grow by 2.2% this year, 2% in 2013, and 2.8% in 2014. The combined GDP in Euro area would contract 0.4% in 2012 and 0.1 percent in 2013. It estimates global economy to grow by 1.4% this year.

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