US, Europe risk another recession, report says

PARIS?? The United States and others must "be prepared to face the worst" as Europe slides toward another recession, according to a gloomy warning from the Organization for Economic Cooperation and Development.

Failure by EU leaders to stem the debt crisis that has spread from Greece to much-bigger Italy "could massively escalate economic disruption" and end in "highly devastating outcomes," the Paris-based OECD said in its latest bi-annual economic forecast on Monday.

Improved global prospects would also depend on the enactment of a credible medium-term fiscal program in the United States, it said.

"The global economy is not out of the woods," the report said.

It added that even the U.S. was at risk of returning to recession if "no action [was] agreed to offset the large degree of fiscal tightening implied by current law."

"This could tip the economy into a recession that monetary policy could do little to counter," it said.

It predicted Britain will slip back into a modest recession early next year, threatening to derail deep austerity measures there.

Story: Timothy Geithner, Barack Obama ramp up pressure on Europe over economic crisis

It also recommended an urgent boost top the EU bailout fund and called on Europe's central bank to do more to stem the crisis.

Global gloom
The OECD report was the latest in a series of increasingly gloomy forecasts, and comes as China's economy is slowing and Japan's exports are tumbling.

Eastern European countries are wobbling as credit dries up from a pullback in lending by eurozone banks.

In the United States, the improving economic picture has clouded somewhat after a mixed batch of economic data and downward revision to third-quarter growth to 2.0 percent doused some of the optimism for a strong fourth quarter. Consumer spending slowed in October and business investment weakened, showing a recovery that remains weak and vulnerable to shocks.

Against this uncertain backdrop, financial markets are volatile as European leaders fail to deliver any credible solutions to the sovereign debt crisis and U.S. lawmakers hit gridlock on slashing the budget deficit, further eroding business and consumer confidence and damaging growth prospects.

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The U.S. labor market epitomizes these problems.

Two years into a recovery in which corporate profits are robust, hiring should be rebounding sharply. But U.S. employment numbers due on Friday are expected to show an economy treading water, with 120,000 new hires in November, up from 80,000 the prior month but way below the level needed to improve the outlook.

"The trend has been fairly stable over the last five months, stuck at a level just about strong enough to absorb new entrants into the labor force, but not to reduce the unemployment rate significantly," said Jeoff Hall, economist at IFR Markets, a Thomson Reuters company.

In fact, large U.S. companies are showing new caution.

Boeing Co announced plans last week to shutter a Kansas factory that employs 2,100 as it prepares for U.S. federal budget cuts that will hit defense spending hard. Bank of America began sending lay-off notices last week to technology staff as part of plans to cut 30,000 positions over the next few years, and Wells Fargo & Co also began job cuts.

Whirlpool Corp, the world's largest maker of household appliances, reports softening demand worldwide, including fast-growing emerging Asia and Latin America, and is cutting about 5,000 jobs in North America and Europe.

Srinivas Thiruvadanthai, director of research at the Jerome Levy Forecasting Center, also is concerned that fiscal tightening in the United States ? from the roll-off of 2009 stimulus projects, cutbacks to city and state budgets and possible expiration of the payroll tax cut ? will further weaken the U.S. consumer, who accounts for the bulk of growth.

"Clearly Europe is in bad shape, and the global economic conditions are worsening too. If the U.S. consumer tires, the chances for recession are met," he said.

Since late September, the Levy Center has forecast that Europe's debt crisis will hit the United States through financial markets, its banks, weakened exports, lowered corporate profits and drag the United States into recession in 2012. Thiruvadanthai sees nothing to alter that picture.

European mess
European finance ministers meet again on Tuesday to review strengthening the region's bailout fund, seen only a month ago as the centerpiece for halting its debt crisis. But the sharp deterioration in eurozone debt prices, which sucked in Germany last week in a failed bund auction, has undercut how much the fund can be leveraged, leaving investors highly skeptical that politicians can use it to stem contagion.

Italy issues 8 billion euros in longer term debt on Tuesday. Two-year Italian paper already is priced a 8 percent, one full point above the yield considered affordable by a nation with a stalled economy. Belgium, downgraded from AA-plus to AA by S&P on Friday, raises cash a day earlier, with the cost of insuring its debt having hit a record level.

Goldman Sachs warned on Friday that the public sector funding problems, which are hurting bank profits, are restricting household and corporate credit in Europe. This "could turn the moderate recession we are forecasting into something more akin to the 2008/09 experience."

Ripples from the slowdown are felt as far away as Brazil. Its central bank is expected to lower interest rates on Wednesday for third time since August, by a hefty 50 basis points, to 11 percent.

For the United States, recession remains a minority view, though forecasts are being revised downward for 2012. The Institute of International Finance, for instance, noted near-term resilience in its latest forecast but storm clouds ahead.

As long as European leaders delay in delivering a fiscal union that can rescue the common currency, financial markets will remain in the driving seat and the growth picture shaky.

"The world is struggling along, with downside risks from a bust-up of the eurozone, or Greece, Italy and Spain leaving. It might be that Europe just runs out of time to fix its problems," said Paul Ashworth, economist at Capital Economics.

Reuters and msnbc.com staff contributed to this report

Source: http://www.msnbc.msn.com/id/45459405/ns/business-stocks_and_economy/

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