In its half-yearly update, the Organization for Economic Co-operation and Development said that protracted economic weakness in Europe "could evolve into stagnation with negative implications for the global economy."
The OECD again slashed its forecast for the economy of the 17-country eurozone, saying it will shrink by 0.6 per cent this year, after a 0.5 per cent drop in 2012. The OECD had predicted a 0.1 per cent decline for the eurozone in its report six months ago — and this time last year, it forecast growth of nearly 1 per cent for 2013.
The U.S. economy will continue to outpace Europe, the OECD said, with growth of 1.9 per cent in 2013 and 2.8 per cent in 2014. For global gross domestic product, the OECD forecasts an increase of 3.1 per cent for this year and 4 per cent for 2014.
It projects Canada's growth will be slower than the United States, with a 1.4 per cent advance this year and 2.3 per cent next year.
Noting that eurozone policy-makers have "often been behind the curve," the OECD warned that Europe was still beset by "weakly capitalized banks, public debt financing requirements and exit risks."
Meanwhile, the eurozone's 12.1 per cent unemployment rate "is likely to continue to rise further ... stabilizing at a very high level only in 2014," the OECD said.
The report predicts unemployment will reach 28 per cent in Spain next year and 28.4 per cent in Greece.
The eurozone economy shrank 0.2 per cent in the January-March period, the sixth consecutive quarterly decline, making it the eurozone's longest ever recession.
Austerity measures have inflicted severe economic pain and sparked social unrest across the continent. Europe's young people are especially suffering, with unemployment of around 50 per cent in some of the hardest-hit eurozone countries such as Spain and Greece.
But OECD Secretary-General Angel Gurria also noted that the tough reforms those countries made — such as loosening their labour markets and making public administrations more efficient — will soon bear fruit.
"In the periphery in particular, which was hardest hit by the crisis, that is where the reforms are taking place at the faster pace and where things eventually are, I believe, going to be looking better faster once we go through the acute stage of the crisis," Gurria told reporters.
With a population of more than half a billion people, the EU is the world's largest export market. If it remains stuck in reverse, companies in the U.S. and Asia will be hit.
Last month, U.S.-based Ford Motor Co. lost $462 million in Europe and called the outlook there "uncertain."
The OECD also urged the European Central Bank to take additional emergency steps to boost the economy. It said the eurozone's central bank should take the unusual step of cutting the interest rate it pays banks for depositing money with it to below zero. This would push banks to lend money rather than hoard it as super-safe central bank deposits.
The OECD also said the ECB should issue clear guidance on how long its exceptional measures, such as very low interest rates, will remain in place — along the same lines as the U.S. Federal Reserve. The ECB was even urged to consider buying assets such bonds — a tool that can ease borrowing costs and increase the supply of money in the economy but one that the central bank has so far been reluctant to take.
Other major economies have faltered this year but none are in recession, like Europe. The U.S. economy grew 2.2 per cent last year and China, the world's No. 2 economy, is growing around 8 per cent a year.
In the U.S., the organization urged politicians to soften automatic across-the-board budget spending cuts to make them less harmful to growth, and said "a credible long-term fiscal plan needs to be put in place."
Sarah DiLorenzo in Paris contributed to this article.Suggest a correction