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OECD: US economy teetering, Europe resisting

Latest update : 2008-03-21

The OECD's forecast confirms a US economic slowdown but stops short of calling it a recession while the Eurozone shows signs of resisting, it says.

 

The US economy is teetering on the brink of recession but eurozone countries could pull through the global financial crisis without special measures, the OECD said on Thursday

  

The OECD slashed US growth estimates for the first half of this year, saying the latest data "suggest that the US economy is now essentially moving sideways, if not contracting outright."

  

The US economy was now expected to grow 0.1 percent in the first quarter, a sharp reduction from the 0.3 percent estimated in December, and to show zero growth in the second, a sudden halt compared with 0.4 percent given previously.

  

Despite the sharp downward revision, acting chief OECD economist Jorgen Elmeskov said in a statement "it may be premature to declare a recession" in the United States.

  

The OECD interim assessment report said the eurozone economy would grow 0.5 percent in the first quarter, up from 0.4 percent, but slip to 0.4 percent in the second, down from 0.5 percent.

  

But the estimate showed the British economy doing better than expected in the first quarter, growing by 0.6 percent from a previous estimate of 0.4 percent, although the second-quarter estimate of 0.6 percent was unchanged.

  

Japan would grow by 0.3 percent in the first quarter, down from 0.4 percent previously, and by 0.2 percent in the second quarter, down from 0.4 percent.

  

The overall tone of the OECD's assessment was one of concern about the slowdown in the US, and of signs that flattening US activity is being accompanied by inflationary pressures: a phenomenon usually referred to as stagflation.

  

"The US economy is going to be very weak" over the first two quarters, Elmeskov told a press conference later, but Europe "will be in nowhere near the same camp as the US."

  

For 2008, the US economy would likely grow 1.4 percent, down from the December estimate of 2.0 percent, Elmeskov said, stressing that this projection was based on the early estimates only and would be formally reviewed in May.

  

On the same basis, Eurozone growth would be unchanged at 1.5 percent and Japan fall to 1.5 percent from 1.6 percent.

  

Elmeskov said that the global economy faced major headwinds, with a growing level of distrust in the financial markets, as reflected in the credit crunch, feeding through into the real economy as funding costs rose.

  

The US housing market collapse "has further to go ... there will be falling house prices for some time to come," he said, adding that the slump was now very bad and likely to turn out to be the worst on OECD records.

  

At the same time, rising food, energy and raw material costs were stoking inflation, making it more difficult for central banks facing a choice between cutting interest rates to spur growth and keeping them high to curb prices.

  

"Headling inflation is being boosted everywhere," Elmeskov said, noting that if people began to expect further price hikes, "it could be very costly; (there are) some yellow (warning) lights flashing."

  

Whilst saying current US monetary policy was "appropriate ... one would want to think closely about the risk of inflation expectations becoming un-anchored before moving further," he cautioned.

  

Despite these headwinds, Elmeskov said there were no signs yet of a slowdown outside the OECD countries but there "must be limits as to how long" this can continue and whether the non-OECD could really decouple from OECD.

  

The OECD, a multilateral government research body, said its latest estimates reflected a sharp downturn in US economic conditions since December, with financial markets in turmoil, evidence of employment weakness, plunging confidence and further declines in the housing market.

  

The report praised action by the Federal Reserve and US government to boost the US economy through lower interest rates and a fiscal injection but said the eurozone did not need such stimulus.

  

"In the euro area ... the near-term outlook for activity and inflation does not point to a need for stimulus and automatic fiscal stabilisers will provide more support than in other regions," said Elmeskov in the statement.

  

Automatic stabilisers are such levers as unemployment benefits which automatically stimulate the economy as the cycle turns downwards.

  

"In Japan, there is limited scope for responding to greater weakness."

  

In December, when the OECD published its last forecasts, it said the United States faced a sharp slowdown in momentum but should escape recession.

  

The OECD groups the governments of 30 mostly developed democratic countries, including the three powers of North America, most of Europe and Asian Pacific members Australia, Japan, South Korea and New Zealand.

Date created : 2008-03-21

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