The global recovery shows signs of easing on slowdown in emerging economies but remains on track for 4.6% growth this year, dipping to 4.2% in 2011, the OECD said today.
Many countries must work harder and faster to cut budget deficits next year and some may have room to offset this for a while with even cheaper money. But exceptionally low interest rates can not last, the Organisation for Economic Cooperation and Development warned.
What the OECD recommends for the euro zone
The US should consider continuing relaxed monetary conditions for the next few years, it said, but also insisted that in general in leading economies 'monetary policy must gradually return to a more normal stance'.
Read the OECD's prognosis on the US economy
The OECD suggests that sometime in 2012 exceptional stimulus measures should be on the way out on a global basis.
A broad risk 'relates to the very low levels of long-term interest rates in major OECD economies,' it said in its six-month review of the world economy.
'The current levels of long-term rates are difficult to reconcile with the projection of a mild but sustained recovery,' the Paris-based group said. Radical action to correct national finances will pay dividends in the medium term, the report said, playing down the risk that widespread corrections would have dire effects on growth.
But it also warned at length of dangers in long-lasting exceptionally low rates, notably on sovereign debt markets. One danger was that easy money was causing a problematic flow of funds into emerging economies and currencies.
However, there were signs that some foreign exchange movements were in line with a correction of global payments imbalances. Set against this, it warned: 'Global imbalances remain wide, and in some cases have started widening again, and there are rising concerns that they may threaten the recovery.'
Global imbalances - massive trade surpluses in exporters such as China and massive deficits in importers like the US - have stoked fears of a currency war as each side devalues its money to gain an advantage. The OECD noted that such 'unilateral action' risked 'triggering protectionist moves.'
Read what the OECD has to say on Asian economies
Euro zone rules for controlling overspending should be tightened, the OECD said.
Controversially, it also suggested that a rescue fund for euro zone countries in trouble 'could be made a permanent feature of the euro area'.
This was an indirect reference to market tension over what will happen when the rescue scheme, set up after the Greek crisis, ends in 2013.
Overall, growth in the OECD industrialised countries is likely to ease next year and then pick up in 2012 but this will require careful management as governments rein in anti-crisis stimulus measures to allow market forces back to work.
The OECD warned too of 'significant risks to the downside', among them high debt levels, weak US and UK housing markets and the possibility that low interest rates, including the rates at which governments borrow, could rise suddenly.
The OECD left its 2010 global growth forecast unchanged from its last forecast in May at 4.6%, and said growth would dip to 4.2% next year and then rise to 4.6% in 2012.
It downgraded the 2010 US estimate to 2.7% from 3.2% but upgraded the euro area to 1.7% from 1.2%. Japan will do well this year with growth of 3.7%, up from the previous estimate of 3%, but then fall away sharply to 1.7% in 2011 and 1.3% in 2012.
For the 33 OECD countries as a whole, growth was put at 2.8% for 2010, falling to 2.3% next year and then back to 2.8% in 2012.
The OECD warned that governments, having borrowed heavily to fund stimulus measures to get through the crisis, must now cut debt down. The cost, however, will be high - the equivalent of 8% of gross domestic product in the US and Japan to stabilise debt ratios by 2025.
It will take an adjustment of 5-6% in Britain, Portugal, Slovakia, Poland and Ireland, it added.
