OECD

The OECD lowers its projections

Wednesday 04 June 2008

The OECD lowered its world growth projections from 2.3 % down to 1.8 %. The forecast is even lower for 2009 at 1.7 %.

PARIS - U.S. economic growth will slow to a crawl, inflicting heavy collateral damage on Western Europe and Japan, because of a "triple shock" of market turmoil, high commodity prices and the end of the housing boom, the OECD said on Wednesday.

Emerging economies like China will continue to thrive although growth is likely to be at a less heady pace, the Organisation for Economic Co-operation and Development said in a twice-yearly report.

Inflation may remain high for some time despite the extent of the U.S. slowdown and knock-on impact on growth in other primarily long-industrialised regions, it added.

The OECD, a public agency financed by its 30 mostly wealthy country members, highlighted problems and uncertainty caused by a shift in global economic power towards fast developing nations such as China, Brazil, India and oil-rich Russia.

It forecast a second-quarter contraction in the U.S. economy and just 1.2 percent growth for 2008 overall as a result of a housing slump and its impact on the broader economy.

"The picture is of a flat U.S. economy until the end of this year and afterwards recovering only gradually," OECD chief economist Jorgen Elmeskov told Reuters, describing any suggestion that Europe or Japan could go unscathed as "a myth".

The OECD predicted a weak second quarter in the euro zone, with just 0.2 percent growth, annualised, versus the previous quarter. It forecast that the Japanese economy would expand 1.1 percent also annualised in the same period.

For this year overall, growth would slow to 1.7 percent in both the euro zone and Japan. While better than in the United States, this marks a drop from 2.6 and 2.1 percent respectively in 2007.

TRIPLE TROUBLE

"OECD economies face a triple adverse shock as globalisation evolves," the OECD said, adding that emerging market economic growth would continue at a healthy rate, in Eastern Europe too, even if it decelerated marginally.

The three shocks were the financial market turbulence which spilled out of the United States after the meltdown of the sub-prime mortgage market, the end of an international boom in house prices and soaring costs of food and fuel, it said.

"These three shocks are inextricably linked to the growing importance of emerging markets in the global economy."

"OECD economies have been hit by strong gales over the recent past and it will take time and well-judged policies to get back on course," the Paris-based organisation said.

Central banks, performing a balancing act between rising inflation and slowing growth, should leave interest rates where they are for as much as a year in the United States, in Japan and -- until the end of 2009 -- in the euro zone.

In Canada and Britain, however, they might need to cut rates quite sharply -- by 3/4 or a full percentage point in the nearer term to offset a downturn, albeit not straight away in Britain.

COUNTING CONTAGION COSTS

The OECD estimated the impact on growth this year and next from the financial market turmoil in the United States, as well as spillover effects in other regions.

Europe and Japan were far from immune, it said, though half of the fallout was due to exchange rate shifts related to the U.S. downturn and market turmoil, rather than direct contagion via deteriorating conditions in credit and stock markets.

OECD simulations suggested financial turmoil would cut U.S. economic growth by about 3/4 of a percentage point in 2008 and by 1-1/4 percentage points in 2009. The impact would be similar in Europe and almost as great in Japan, but less so in China.

The end of a decade-long housing boom would hurt some countries such as Spain, Ireland and Britain more than others. More widely, the loss of construction investment would no longer be an engine of economic growth.