OECD: The US Will Power Ahead Of Europe, But 2 Risks Make Its Recovery Fragile

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Recent economic data suggest the U.S. economy will power ahead of Europe in the first half of 2012, with consumers growing increasingly confident and boosting activity in the former while more reforms are needed in the latter to boost growth, the organisation for Economic Cooperation and Development (OECD) said in a report on Thursday.”In the United States, growth prospects continue to firm,” the organisation said. “The rebound in equity prices, stronger consumer confidence, and growth in nonfarm payroll employment have lifted projected activity.”

The improved outlook was also reflected in better consumer confidence, increased motor vehicle sales, industrial production and credit growth, it said.

The OECD warned, however, that high oil prices, as well as the housing market, which remains fragile, pose a threat to the recovery in the United States.

The improved outlook for the U.S. contrasts with a weak outlook for Europe.

“The situation for the three largest euro area countries in aggregate is expected to remain fragile, with negative growth projected for the first quarter of 2012 and a moderate rebound in the second quarter,” according to the OECD.

The report warned of “unfinished business” in the euro zone, saying European Union leaders need to increase the size of the euro zone bailout “firewall” in order to restore confidence.

The firewall is a permanent rescue fund and is designed to avoid contagion from weaker countries and contain economic damage in the euro zone. 

“Despite recent initiatives in the euro area, both by area-wide institutions such as the [European Central Bank], and by individual countries, sovereign debt yields remain high in a number of countries,” the OECD said in its report.

OECD Secretary General Angel Gurria, who said earlier this week that Europe needed the “mother of all firewalls” told CNBC on Thursday it was still unclear how big that firewall needed to be.

European finance ministers meet in Denmark on Friday and Saturday to discuss an increase in the size of the permanent rescue fund.

“What you have is now the makings of a very large credible firewall that could really deter speculation and which could really ease conditions in the bond markets particularly for the countries that have been under pressure in the last few months,” he said.

Fears that Portugal will need to seek a second EU/IMF bailout are growing, but Gurria said the country was less of a worry than some other euro zone countries.

“It’s really the large debtors of Spain and Italy where the consequences of contagion could be more serious,” he said.

The elevated yields on Portuguese debt – currently hovering around an unsustainable 12 per cent – were an indication that the euro zone still needed to find the right mix of fiscal consolidation and growth, he said. 

“The firewall , again, (is) not yet there. We may be 48 hours away, 72 hours away from it, but it still has to be in place,” Gurria said.

It warned that growth in lending in the euro area remained weak and had recently decelerated even further, despite recent ECB interventions.

Measures to shore up the financial sector in Europe also need to be implemented, including recapitalization of weak banks, the OECD said.

European regulators have asked banks to retain core capital—a measure of a bank’s financial strength—of 9 per cent in order to ensure that they can withstand future shocks in financial markets.

The OECD pointed to “deep structural factors” that led to a loss of competitiveness in Europe’s high-debt countries as a key underlying cause of the European sovereign debt crisis.

“An array of structural reform measures are required to address these fundamental imbalances, in both surplus and deficit countries, and to boost growth overall,” the report said.

This post originally appeared at CNBC.

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