OECD downgrades Australian growth, warns Europe is largest threat to global economy

A European recession won’t do much to slow Australia’s economic growth, which is forecast to reach 4% in 2012 and is set to be the fastest in any developed economy, according to the latest OECD economic outlook released overnight.

The country will grow to a 4% rate next year before slowing slightly to 3.2% in 2013, the figures show.

However, that is revised down from 4.5% in June.

Chief OECD economist Pier Carlo Padoan says the global economy looked much worse than it had at the release of the previous OECD economic outlook in June.

“The situation in the Euro area is rapidly deteriorating and contagion is spreading,” he said in a statement.

“Policy continues to be behind the curve, not only in the Euro area, also in the United States. So we think that swift and decisive action is needed to avoid the worst.”

It’s the bleakest picture yet for Europe. On November 10, the European Commission forecast Europe to grow at 0.8%.

However, the result is strong for Australia. In a statement, the OECD said that investment and exports, along with the mining boom, should “offset the negative impact on activity of a persistently strong exchange rate and fiscal consolidation”.

“Unemployment is expected to stay low and underlying inflation contained as the remaining slack in the economy gradually disappears.”

AMP Capital Investors chief economist Shane Oliver says he wasn’t surprised to see Australian growth had been revised down from earlier in the year.

“The previous projections were way too high given floods earlier this year. The OECD is largely catching up to what other economists are saying.”

“The 4% growth figure is the most debatable. Many would say that it’s too optimistic.”

Oliver suggests a 3% growth figure was probably more likely for Australia.

“OECD forecasts tend to be a bit slow to reflect new information,” he says. “They also run their forecasts by the Federal Treasury in Australia, who does their own detailed forecasting.”

He said this meant the forecast was likely to be similar to that announced by Treasury in this morning’s budget.

“The Government probably pays more attention to the [OECD] international forecasts rather than their Australian economic outlook,” Oliver says.

The outlook expressed support for the Government’s budget cutbacks, of which more are likely to be announced this morning.

“I was a bit surprised,” says Oliver.

“If the 2012 forecast is too high, the desirability of spending cutbacks gets called into question.”