Tim Harcourt

The global economic outlook has deteriorated significantly, according to the Organisation for Economic Cooperation and Development (OECD), and that could have a significant impact on the Australian economy.

The OECD outlook shows how much of a drag Europe is putting on global growth. This is a reason for concern because the world economy needs Europe to grow or at least tread water. These forecasts are pretty dire, and it’s surprising how quickly this has gone from a drama to a crisis.

In its twice-yearly report on the global economic outlook, the OECD has lowered its growth forecasts for the world’s largest economies, and has warned that the euro-zone is headed toward a recession. It also warned that the debt crisis, now affecting countries previously seen as safe havens, could massively escalate economic disruption if not addressed, and create a new worldwide credit crunch, where countries become so worried about getting their money back, they refuse to lend to one another.

The central message is to keep calm. Australia has no reason for direct concern because our trading links are strongly tied to the Asia Pacific. The last three decades of economic reform here has enabled us to move from The Tyranny of Distance to the Power of Proximity. That is, away from the UK and Europe, and more towards our closer neighbours such as Asia and the emerging economies.

The OECD has urged the European Central Bank to act decisively to prevent the euro-zone sovereign debt crisis from deepening, which could drag the worldwide economy to the brink of recession, due to the size of the European economy, and its global reach.

China has strong trade ties to Europe, because China now exports more manufactured goods to Europe than to the USA. We in turn provide most of the raw materials for those exports, and so any impact on China could affect Australia. Even if there are no green shoots of recovery in the USA and Europe, in Australia we will still need bamboo shoots in China.

I do believe however we shouldn’t be too pessimistic. The OECD did say that Australia would maintain a healthy economic growth rate of 4 per cent in 2011 and down a bit to 3.5 per cent in 2012. So we should hopefully be immune from Eurosclerosis, but the world economy overall could do with some Eurovision.

Tim Harcourt is the first J.W. Nevile Fellow in economics at the Australian School of Business at the University of NSW and author of The Airport Economist www.theairporteconomist.com .