G-7 Recovery ‘Decoupling’ Between Europe, North America: OECD

Economic recovery in Europe and North America is diverging as Canada and the United States experience steady growth while European economies continue to falter, a report by the Organization for Economic Cooperation and Development said Thursday.

Our forecast for the first half of 2012 points to robust growth in the United States and Canada, but much weaker activity in Europe, where the outlook remains fragile, said OECD chief economist Pier Carlo Padoan.

While the Group of Seven nations -- Canada, the United States, France, Germany, Italy, Japan and Britain -- are expected to grow at a collective 1.9 percent in the first and second quarters of 2012, the European economies are expected to experience a contraction followed by substantially slower and less-robust growth than the two North American members.

We may have stepped back from the edge of the cliff, but there's still no room for complacency, Padoan said.

The U.S. economy is projected to grow at a rate of 2.9 percent in the first quarter and 2.8 percent in the second, while Canada's is expected to expand by 2.5 percent in both quarters. U.S. growth is likely to be driven by higher equity prices, strong consumer confidence and increased nonfarm-payroll employment.

In contrast, Europe's economies face a triple whammy of weak consumer confidence, rising unemployment and tight credit, all of which could lead to continued declines in productivity. Germany, France and Italy, the euro zone's three biggest economies, are expected to shrink in the first quarter -- by 0.9 percent -- before rebounding to modest growth of 0.4 percent in the second quarter.

The growing gap in growth rates between the continents is indicative of a decoupling of GDP growth between Canada and the United States on the one hand, and Europe on the other: Robust growth is projected in the former, whereas in Europe, the outlook remains weak, Thursday's OECD report said.

Declining unemployment represents in the United States represents a marked departure between its economic outlook and that of Europe.

Taken individually, Germany's economy will squeak by with modest growth of 0.1 percent in the first quarter and 1.5 percent in the second, the OECD predicts, while the French economy is expected to contract slightly by 0.2 percent before experiencing 0.9 percent growth in the second quarter.

In Italy, poor industrial performance and the expectation of recession are projected to create economic contraction of 1.6 percent and 0.1 percent in the first and second quarters, respectively. The country is expected to see its rate of contraction slow in the second quarter.

Government action will continue to be critical, particularly in the euro area, where unfinished policy business on fiscal frameworks, financial firewalls and fundamental structural reforms must move ahead, the OECD's Padoan said.

High yields on Greece's sovereign debt and a slowdown in euro zone lending continue to plague the single-currency area, and fiscal consolidation by some countries, despite the need for restoring confidence, has dampened demand in Europe.

Japan, an economic as well as geographic outlier in the G-7, is expected to see robust growth of 3.4 percent in the first quarter, before it calms somewhat to 1.4 percent in the second. Japanese growth has its roots in increased industrial production as the country recovers from shocks in 2011, and a drop in the value of the yen.

The biggest threat to the overall recovery is rising oil prices. Brent crude has increased more than $10 per barrel since the beginning of February, theresult of disruptions in supply due to low inventories for OECD nations and limited spare OPEC capacity, Thursday's report said. The increase in oil prices is expected to add one-fourth of a percentage point to inflation across the board in OECD countries and decrease average GDP by 0.1 percent to 0.2 percent in the next year.