Fears of QE tapering by the US Federal Reserve
have weighed on global markets and a stimulus cut could damage the recovery (Reuters)
Ongoing work to repair the European banking system and the eurozone's consistent fragility, as well as the looming prospect of the US Federal Reserve tapering its $85bn-a-month asset-buying stimulus programme, threaten to derail an emerging post-financial crisis recovery, according to the OECD.
In its interim economic outlook, a report published bi-annually, the OECD said it expected the improving growth pattern in major advanced economies to continue at a similar pace in the second half of 2013, but significant headwinds threaten to blow a recovery off course.
During the second quarter, the eurozone bloc exited recession, the pace of GDP growth picked up in the UK, and data from the US economy was upbeat as it added more jobs and consumer confidence built.
"There are two major risks. One is that the euro area remains weak and fragile and the financial and banking system needs to be fully repaired," said Pier Carlo Padoan, deputy secretary-general and chief economist of the OECD.
"The other risk is that also triggered by the tapering off of unconventional monetary policy in the United States. These emerging economies are suffering from strong capital outflows and currency depreciation, which could drag [on] their growth further."
China recently warned the US Fed Reserve to play its quantitative easing taper carefully.
Improving US data has led to many economists expecting the Fed to limit its asset purchases, which has offered significant support to market liquidity the world over, by the end of the year - possibly as early as September.
The Asian giant's central bank Vice Governor Yi Gang said China would use the upcoming G20 summit in St Petersburg, Russia, to discuss "how to minimize the external impact when major developed countries exit or gradually exit quantitative easing, especially causing volatile capital flows in emerging markets and putting pressures on emerging-market currencies."
Meanwhile, the eurozone exited its longest recession in history during the second quarter. While there remains certain disparities between the member states, with the likes of Greece still suffering under a tough austerity regime, some of the biggest economies in the currency area have seen data uptick in recent months.
Reforms to Europe's struggling financial sector are still not complete, however.
Banks across the continent are trying to build up their capital buffers to meet strict new regulatory requirements. The capital is meant to shore up banks in case of any future crisis, to spare investors and taxpayers of having to take financial hits to prop up the system once again.
Balance sheet reforms are also ongoing, with many banks still trying to wind-down or sell off their portfolios of toxic loan assets built up before the financial meltdown.
As a result of these two works in progress, European banks are exposed to sudden financial shocks which could harm a global recovery.
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