Dubai: Advanced economies are on the verge of plunging into an abyss of recession and even depression, the Organisation for Economic Co-operation and Development (OECD) warned yesterday.
The Paris-based think tank says the deepening sovereign debt crisis in the Eurozone is set to result in waves of bankruptcies and wealth destruction across the 17-nation bloc, which would also have a severe impact on Gulf economies.
The Eurozone is already in a slight recession and the credibility of governments to contain the situation has been stretched to the limit: one false step now could tip the United States, Japan and advanced economies into a new grim landscape.
"The euro-area crisis represents the key risk to the world economy at present," the OECD said. "A large negative event would... most likely send the OECD area as a whole into recession," it added.
The 34 OECD nations will grow 1.9 per cent this year and 1.6 per cent next, down from 2.3 per cent and 2.8 per cent predicted in May, the OECD said in an unusually stark outlook report.
"Scepticism has grown that euro-area policymakers can deal effectively with the key challenges they face," OECD Chief Economist Pier Carlo Padoan wrote in the report. Serious downside risks remain, linked to "loss of confidence in sovereign-debt markets and the monetary union itself".
The Eurozone was set for growth of 1.6 per cent this year and next year just 0.2 per cent, the OECD said.
The worrying growth forecast also has dire implications for the GCC as commodity prices, including crude oil, could see massive price falls if the dollar strengthens and risk-aversion levels continue to soar.
"Growth prospects for the Gulf economies next year very much depend on events in the Eurozone," said Giyas Gokkent, chief economist at National Bank of Abu Dhabi. "Regional economies will do quite well next year if oil prices are maintained at current levels. Right now, we are working on the assumption that oil prices will remain around $100 [Dh367] a barrel in 2012 but that assumes there is no further meltdown in the Eurozone," he added.
Gokkent says countries such as Turkey and Egypt would feel the strongest impact from a recession in the Eurozone as they have the greatest exposure to the bloc from a trade perspective. "Goods exported from the GCC are less prone to contagion. Economies need oil; it is a fundamental raw material," Gokkent said.
Capital markets across the Gulf are already feeling the impact of the Eurozone's debt crisis as liquidity dries up and volumes dwindle. "We have already seen a dramatic reduction of liquidity in local equity markets; it cannot really get much worse," said Anastasios Dalgiannakis, institutional trading manager at Mubasher Financial Services.