By Ingrid Melander
PARIS (Reuters) - The global economy will gradually improve over the next two years but Japan will grow less than previously expected while the euro zone struggles with stagnation and an increased deflation risk, the OECD said on Tuesday.
There will be marked divergences among countries both in terms of growth and monetary policy, leading to volatility in debt and foreign exchange markets, the Organisation for Economic Co-operation and Development said.
The United States and Britain will grow more strongly then the euro zone and Japan and, among emerging countries, India, Indonesia and South Africa are set to recover steadily. Russia's economy is set to stagnate next year and China's will soften, the think-tank said in its bi-annual economic outlook.
Overall, the global economy is set to grow by 3.3 percent this year, 3.7 percent in 2015 and 3.9 percent in 2016, the OECD said, confirming forecasts published before the G20's summit earlier this month.
While most estimates remained unchanged, Japan's forecast was more than halved for 2014 and cut to 0.8 percent for next year after it unexpectedly fell into recession in the third quarter. But the OECD still expects Japan to recover as corporate profits remain high and a weak yen will help exports.
A bigger worry for the Paris-based think-tank is the euro area, which it said "may have fallen into a persistent stagnation trap".
"The euro area is at risk of deflation if growth stagnates or if inflation expectations fall further," it said.
Its inflation forecasts of 0.6 percent for the euro area next year and 1.0 percent for 2016 are slightly more pessimistic than the EU's own forecasts and far from the European Central Bank's target of just below 2 percent.
MONETARY STIMULUS
The OECD therefore reiterated its call for the ECB to embark on quantitative easing in the euro zone.
"Further monetary stimulus could involve more purchases of asset-backed securities and covered bonds, and also purchases of government bonds, possibly via a weighted basket of euro area countries, and investment-grade corporate bonds," it said.
The OECD said that below-target budget plans put forward by France and Italy, which are expecting the EU's verdict on their policies by the end of the week, are "appropriate" to help boost growth.
In the United States growth is projected to gain more momentum and remain above trend, the OECD said, reaching 3.1 percent next year.
Britain's economic growth looks set to slow slightly to 2.7 percent next year, the OECD said – above the long-run average but just below the 2.9 percent forecast by the Bank of England earlier this month. Continued weak productivity remained a major risk.
The BoE should start to raise interest rates in the middle of 2015 to stop inflation picking up too much, the OECD added, a few months earlier than implied by the BoE's recent economic outlook.
Growth in China is projected to soften a bit, the OECD said. "Stimulus measures taken this year continue to support output growth, but property market activity remains weak," it added.
The think-tank has calculated that a gradual 10 percent depreciation of the euro and the yen against the dollar over the next two years could potentially raise growth in the euro area and Japan by around 0.2 percentage point next year and twice as much the following year.
While geopolitical tensions over Ukraine and the Middle East have grown, this has had little impact on commodities markets so far but the risk remains, the OECD said.
(Additional reporting by Stanley White in Tokyo, David Milliken in London, Sarah White in Madrid, George Georgiopoulos in Athens; Editing by Alexandria Sage/Ruth Pitchford)