Colin Barr

Following the money in banking, economics, and Washington

OECD: joblessness on the horizon

May 26, 2010: 10:54 AM ET

Growth is back. Jobs? Not so much.

The Organisation for Economic Co-operation and Development boosted its economic growth forecasts for 2010 and 2011, saying rich countries' economies are recovering faster than expected.

But it warned of increasing risk from the sovereign debt bug that has bitten Europe this spring, and added that high levels of joblessness will complicate long-awaited fiscal belt-tightening plans.

In need of support

The OECD said it expects gross domestic product in its 31 member countries to rise 2.7% this year and 2.8% next year. That's up from its previous forecasts of 1.9% and  2.5%.

"Trade flows are rising again," the Paris-based organization said. "Strong growth in China and other emerging markets is helping to pull other countries out of recession."

The OECD said it expects U.S. growth of 3.2% in both years, while Europe will lag. The euro area's output will expand just 1.2% this year and 1.8% next, according to the forecast.

The report warns that growth in emerging economies such as China and India could bubble over, forcing authorities there to pull back and reducing growth opportunities for rich countries.

"The risk of overheating and inflation is growing in emerging markets," the OECD said. "A boom-bust scenario cannot be ruled out."

The report also notes the need for governments to put their fiscal houses in order at a time of growing concern about their ability to repay massive debt loads. Policymakers must wind down emergency support for economies by next year, the OECD said.

"Many OECD countries need to reconcile support to a still fragile recovery with the need to move to a more sustainable fiscal path," OECD chief Angel Gurria said.

At the same time, the organization warned that jobs growth remains fleeting. The report forecasts that U.S. unemployment will average 9.7% this year, compared with a recent 9.9%, and fall only to 8.9% next year. The forecast for Europe both years is 10.1%.

The OECD's recommendations when it comes to employment highlight the tightrope policymakers must walk between impressing bond markets with austerity measures and risking a permanent reduction in the economy's capacity.

"Although economic activity is picking up, the growth in jobs is not keeping pace," the OECD said. "Governments must make room in their budgets for cost-effective labor market programs that support workers at greatest risk of becoming long-term unemployed."

It's plain to see at a time when Greece, Spain and Ireland are in the news daily that that won't be easy.

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Colin Barr
Colin Barr
Senior Writer, Fortune

Colin Barr has covered finance for Fortune.com since November 2007. Previously he was a writer and editor for TheStreet.com, winning a 2006 Society of American Business Editors and Writers award for "The Five Dumbest Things on Wall Street," and for Dow Jones Newswires. He is a 1991 graduate of Penn State and lives in Port Washington, N.Y., with his wife Meena Bose and their two kids.

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