The OECD raised its growth forecast for the euro zone economy today to 1.2% this year but urged it to tackle financial weaknesses which could slow recovery and threaten monetary union.
The grouping of 30 developed nations forecast gross domestic product across the 16-nation bloc would rise by 1.2% in 2010 - raising its last estimate of 0.9% growth made in November. It forecast growth of 1.8% for 2011.
The OECD forecast that the Irish economy would shrink by 0.7% this year, but grow by 3% next year. It said the Irish economy appeared to be 'close to a turning point', but warned that the problems created by the property boom would hold back consumer spending and investment for some time.
The organisation also warned that Ireland's budget deficit remained very high, and the Government must continue to meet its targets for cutting this. It forecast an average unemployment rate of 13.7% this year, falling to 13% in 2011.
Euro zone recovery 'gradual' - OECD
'A gradual euro zone recovery is under way driven by economic policy stimulus, a rebound in world trade and improving financial conditions, although there has recently been significant financial market volatility,' the OECD said.
'Difficulties in restoring competitiveness and sound public finances in some peripheral countries may complicate recovery,' it added, however, in its twice-yearly world economic report.
Recovery in Germany, although fundamentally robust, would pick up from the second quarter as exports benefited from a rebound in world trade. It predicts that the outcome for the whole of 2010 would be 1.9%, from a contraction of 4.9% last year, and then rising to 2.1% in 2011.
'Notwithstanding the temporary weakness, the underlying growth momentum is intact and suggests solid growth going forward,' the OECD said.
Growth in France, the second main economy in the euro zone after Germany, would rise somewhat to about 2% this year and next, led by business investment, exports an end to destocking by companies. Growth last year was 0.8%.
But France should unwind measures used to stimulate the economy during the global economic crisis, the report said. And the government should undertake reforms of public pensions, health care and the administration to signal a 'commitment to cut spending in a sustainable way'.
Costly stimulus measures to drag countries out of recession following the 2008 financial meltdown have forced euro zone governments to enact tough spending cuts now that recovery seems to be underway.
European countries have also had to support Greece with a massive emergency loan package to rescue it from a debt crisis that has raised fears for other countries such as Portugal and Spain.
In its overall world assessment, the Organisation for Economic Cooperation and Development (OECD) warned that the euro zone debt crisis combined with overheating in emerging markets elsewhere could undermine a broader recovery.
'The sovereign debt crisis has highlighted the need for the euro area to strengthen significantly its institutional and operational architecture to dissipate doubts about the long-term viability of the monetary union,' it said.
It also forecast that unemployment in the euro zone would remain stubbornly high at more than 10% this year and next. 'Persistently high unemployment in much of the euro area, and financial deleveraging by indebted households and businesses will weigh on domestic demand,' it said.
OECD also raises US growth forecast
The OECD raised its growth forecast for the US economy to 3.2% for this year but warned of growing global imbalances and urged the government to cut stimulus spending.
The Paris-based organisation also said that growth would likely remain 'moderate' at 3.2% next year 'as households continue to rebuild net worth and the unemployment rate declines slowly.'
In its previous forecasts issued in November 2009, the OECD had forecast economic growth in the US of 2.5% this year and 2.8% in 2011.
But the group warned that it was still 'unclear' if output growth is self-sustaining and what the effect will be when the stimulus is cut.
'Keeping the stimulus in place risks recreating some of the imbalances in the housing and financial markets that led to the financial crisis,' the OECD said in its twice-yearly Economic Outlook report.
The US government has poured hundreds of billions of dollars into the economy since 2008 to try and combat the worst downturn since the Great Depression by boosting economic activity and propping up banks.
But today the OECD said the US government's fiscal policies were 'unsustainable'. The US 'needs to develop sustainable medium-term consolidation plans setting out in detail how improvements in public finances are to be achieved,' it said.
'The recession exacerbated already weak budget positions at all levels of government,' it said, pointing to a government budget deficit that is projected to remain at around 9% of output next year.
While highlighting strong signs of recovery in some sectors, the OECD said that bank lending and the housing market were still weak, pointing in particular to difficulties faced by businesses in obtaining loans.
The report also said it would be 'a number of years' before employment returned to pre-recession levels and said there was a risk that high long-term unemployment turns into a permanently higher level of unemployment.
On the plus side, the report pointed to industrial production growth, increased employment and a recovery in the stock market.
It also warned that efforts made to redress some of the economic imbalances - such as low household savings among ordinary Americans - which helped trigger the economic crisis, were now being rolled back.
Meanwhile, the OECD today urged Japan to develop a 'credible' plan to scale back its stimulus spending and cut its massive public debt, as scrutiny of the country's fiscal situation continues to build.
Decades of heavy stimulus spending and falling tax revenue have given Japan a public debt mountain bigger than any other industrialised nation, which the OECD warned would hit 205% of gross domestic product in the next year.
With public debt already the highest ever recorded in the OECD area,' the organisation also forecast Japan's net debt to hit 122% of GDP, 'the highest among OECD countries after Greece.'
Given 'Japan's very high public debt, the government should scale back expenditure increases in 2011,' the Paris-based group added.
Japan should 'develop a credible and detailed medium-term fiscal consolidation programme, including tax reform,' it said.
