OECD slashes growth forecast

The OECD slashed its growth forecast for the world's industrialised powers on Wednesday, warning of several lacklustre quarters ahead despite signs that financial market upheavals may have "passed their peak."

The Organisation for Economic Growth and Development in a twice-yearly survey said its 30 member economies were confronting "three adverse shocks" -- continued financial market uncertainty, a housing downturn and soaring food and energy prices.

But it added that OECD economies could find support from "buoyant" emerging market countries, where growth, while moderating, has remained healthy and where appetite for imports is strong.

The Paris-based think tank predicted that momentum in the industrialised world would slow to 1.8 percent this year, from 2.7 percent in 2007, and 1.7 percent in 2009.

The OECD in its last report in December foresaw growth of 2.3 percent this year and 2.4 percent in 2009.

Inflation, driven by climbing commodity prices, likewise looms over the OECD area and is expected to come to 3.0 percent this year after 2.2 percent in 2007.

"Several quarters of weak growth lie ahead for most OECD economies," Jurgen Elmeskov, acting head of the OECD economics unit, wrote in an editorial entitled "After The Storm" that introduced the report.

"The odds have improved that financial market dislocation has passed its peak, but this is far from a foregone conclusion," he said.

"And even if true, the effects on growth are likely to linger."

The OECD said the US economy was expected to remain sluggish all year, contracting in the second quarter before staging a gradual recovery in 2009.

"The US economy will go sideways through the remainder of the year," Elmeskov later told a press conference, noting that "confidence in financial markets is still not very high" and as "housing prices are either slowing or falling."

US gross domestic product was seen expanding 1.2 percent this year and 1.1 percent in 2009.

The eurozone has so far been able to mount some resistance to a global slowdown, driven by "surprising strength" in Germany, and should see growth of 1.7 percent in 2008 and 1.4 percent next year.

But the OECD cautioned that there were now "increasing signs that the appreciation of the euro -- up by some 10 percent in real effective terms since 2006 -- is damping export growth."

As a result, Elmeskov said, "this is not the time for a generalised fiscal relaxation" in the 15 eurozone countries, which are bound to maintain their public deficits below 3.0 percent of gross domestic product.

In Japan, a rebound in housing investment and robust export growth should help the economy expand 1.7 percent this year and 1.5 percent in 2009.

On the downside, according to the OECD, Japanese business investment is weakening while rising food and fuel prices will likely curb consumer spending.

Elmeskov noted that "the continued relative buoyancy of emerging economies gives an important support to OECD countries."

He said that Asian powerhouse China, for example, was "experiencing a significant shift toward the economy being driven by domestic demand rather than exports."

The OECD study said the US Federal Reserve should maintain its readiness to lower interest rates until a economic recovery sets in. The European Central Bank, which has steadfastly refused to ease its monetary policy, should continue to keep its rates on hold.

In Japan, according to the OECD, a weaker growth outlook and the need to counter deflation also argue for no near-term change in monetary policy.

The OECD meanwhile found that the health of the global banking sector had strengthened. Many banks around the world were stunned by the near collapse last year of the US sub-prime housing market, which undermined the value of mortgage-backed securities and triggered a global squeeze on credit.

But the organisation said that in addition to selling off some of their loan portfolios, "financial institutions have seen equity prices at least stabilising, while the prices of credit default swaps have declined," suggesting that risks are improving.

In the United States, according to Elmeskov, "it's in the middle of next year that we expect credit conditions would be normalised" and when US interest rates could begin to rise.

But overall, the OECD said, "financial headwinds are likely to persist ... and are assumed to abate only during the first half of 2009."

It said strains could arise from further mortgage-related losses, deeper disruptions in the US housing market or a US recession.