THE eurozone lacks the capacity to cope with negative economic shocks and its slow growth is vulnerable to international turbulence, the OECD said yesterday in a downbeat analysis of the health of the world economy.

The Organisation for Economic Co-operation and Development cut its world growth projections for this year to 2.6 per cent from the 2.9 per cent it forecast six months ago.

In its twice-yearly Economic Outlook, the Paris-based thinktank reduced its growth estimates for France, Germany, Italy, the UK and Japan, although it strengthened its predictions for the United States.

Italy’s economy in particular had suffered a dramatic reverse in the wake of its recent downturn, with the OECD forecasting that its economy would shrink by 0.6 per cent this year after expecting 1.7 per cent growth in November.

The report said that the euro area’s recovery had been “crimped” by the soaring cost of oil and the strong euro, but it also identified structural flaws in the economies. In Germany, domestic demand had stagnated, and in Italy competitiveness had declined considerably.

It said that Germany’s strong growth figures in the first quarter were a “technical blip” which masked a gradual turnaround, while projections for France pointed to a “significant slowdown”. The OECD predicted growth of 1.2 per cent in Germany and 1.4 per cent in France this year.

While the OECD urged an early cut in eurozone interest rates, it encouraged the US Federal Reserve to continue raising rates to keep “palpable” inflationary pressures in check.

The report projects that the US current account will deteriorate to a historic low of 6.75 per cent of GDP next year, or nearly $900 billion (£490 billion), increasing the likelihood of an abrupt decline in the dollar.

It predicted that if the dollar were to fall by 30 per cent against all other OECD currencies, it would cause a 1 percentage point fall in US demand and output in the next few years. Growth would also decline in the eurozone by more than a percentage point.

The report listed risks that could damage the meagre eurozone recovery further, including continued high oil prices, upward pressure on the euro, a correction in house prices, and a cut in investment prompted by interest rate rises in the US.

Jean-Philippe Cotis, the OECD’s chief economist, said: “In such a context, whatever the political difficulties, the case for further European economic integration and structural reforms remains pressing.” He said that the case for significant rate cuts was compelling.

But Klaus Liebscher, a member of the European Central Bank’s governing council, criticised the calls for an early rate cut. He said: “An interest rate cut . . . would not be in the service of the credibility of the euro system or the inflation expectations of actors in the financial markets.”

The think-tank also cut its forecast for growth in Japan to 1.5 per cent from 2.1 per cent. It said that rising wages and employment would end a recent period of deflation.

But it cautioned that “a delayed pickup in world trade or a significant appreciation of the yen” could undermine the country’s progress.

The OECD forecast that growth in China would moderate from 9.5 per cent in 2004 to 9 per cent this year.

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