The global economic recovery is losing steam in the face of a slowing U.S. rebound and tensions over currencies, and a debt crisis in Europe could trigger more weakness next year, the OECD said on Thursday.

In its twice-yearly report, the Paris-based Organisation for Economic Co-operation and Development said governments needed to tighten public finances and coordinate better on economic policy to usher in a durable recovery.

Short-term stimulus measures were becoming increasingly ineffective, the organisation’s chief economist told Reuters, though it gave its blessing to the Federal Reserve’s recent much-criticised move to buy up billions of dollars of U.S. debt. 1/8 ID:nSLAIME6IK 3/8 1/8 ID:nN17192085 3/8

“The recovery, though still in progress, is more hesitant than in the early part of the year,” OECD Secretary General Angel Gurria told a news conference. “We are in a soft patch… Output and trade growth have both softened as support from fiscal stimulus and other temporary factors have faded.”

The organisation forecast world growth would slow to 4.2 percent in 2011 from 4.6 percent this year before returning to a rate of 4.6 percent in 2012. Last May, it projected expansion of 4.6 percent in 2010 and 4.5 percent in 2011.

Adding to growing uncertainty about the global economy as governments struggle to revive growth with finances left in tatters by the crisis, the OECD said the softer outlook was weighted with risks.

It cited a possible sovereign debt crisis in Europe, foreign exchange market tensions, a potential sharp upward snap in government bond yields, and renewed house price declines in Britain and the United States.

The OECD cut its growth forecasts for the world’s leading economy to 2.7 percent this year, 2.2 percent in 2011 and 3.1 percent in 2012. In May, it had estimated 3.2 percent in both 2010 and 2011.

OUTLOOK UNEVEN

While the economic outlook for the 33 industrialised countries belonging to the OECD varied widely, the organisation raised slightly its growth forecast for the group to 2.8 percent for this year but trimmed it to 2.3 percent for next.

Growth rates in fast-growing major emerging economies would ease to more sustainable levels, continuing to provide a boost to the global economy.

The OECD estimated that the 16-nation euro zone economy would grow 1.7 percent in both 2010 and 2011 as governments tighten strained budgets and peripheral members including Greece and Ireland battle crippling debt burdens.

OECD chief economist Pier Carlo Padoan urged Ireland’s EU partners to help the country deal with its debt crisis, which has flared months after Greece came close to defaulting on its debts, prompting questions about the future of the euro zone.

“We have to recognise that Ireland needs to be steered in the right direction and there is some time to do that but not infinite time,” he said.

The OECD also said that the risk of deflation in most countries was low but not completely gone, possibly warranting central bank action to buy government bonds if the situation worsened.

Quantitative easing was the only short-term stimulus measure still available to major developed economies, and its effectiveness was diminishing, Padoan told Reuters.

“We feel its impact will have (a) decreasing return going forward,” though the Fed’s recent plan to buy $600 billion dollars in government bonds was appropriate in the absence of inflationary risk, he said.

While risks to the economic outlook were tilted to the downside, stock market gains fuelled by strong corporate profits might provide a growth boost, the organisation said.

IMBALANCES

For a broader stabilisation of the economy, cooperation between the Group of 20 countries was essential, and governments could trigger a protectionist backlash if they acted alone to address currency imbalances.

“Growth perspectives could weaken if the large capital inflows into many emerging economies and the associated tensions in foreign exchange markets prompt protectionist responses,” Gurria said.

With developed economies awash with liquidity thanks to rock-bottom interest rates, capital is flooding into faster-growing developing countries with higher rates of return, in many cases driving up their currencies.

One notable exception was China, which the OECD saw contributing to imbalances in international capital flows because its yuan is tied to the dollar.

“This has to be addressed, but … with the appropriate timing and sequencing,” Padoan told the news conference.

“This cannot be addressed tomorrow but in a medium term perspective… This is why we need international collaboration to agree on the timing of that adjustment.”