The OECD slashed its growth forecast for the world's industrialised powers today, 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.
It predicted that momentum in the industrialised world would slow to 1.8% this year, from 2.7% in 2007, and 1.7% in 2009. The OECD in its last report in December foresaw growth of 2.3% this year and 2.4% in 2009.
Inflation, driven by climbing commodity prices, likewise looms over the OECD area and is expected to come to 3% this year after 2.2% in 2007.
'Several quarters of weak growth lie ahead for most OECD economies,' said Jurgen Elmeskov, acting head of the OECD economics unit. 'The odds have improved that financial market dislocation has passed its peak, but this is far from a foregone conclusion. And even if true, the effects on growth are likely to linger,' he said.
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. US gross domestic product was seen expanding 1.2% this year and 1.1% in 2009.
The euro zone 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% in 2008 and 1.4% next year.
But the OECD cautioned that there were now 'increasing signs that the appreciation of the euro is damping export growth.'
In Japan, a rebound in housing investment and robust export growth should help the economy expand 1.7% this year and 1.5% 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.
STEADY RATES URGED
The 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 also 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.
Banks in the US and elsewhere have reported write-downs and losses linked to the sub-prime crisis worth about $380 billion, according to the OECD.
But the organisation noted 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'.
It said this suggested that risks are improving. Nevertheless, 'financial headwinds are likely to persist and are assumed to abate only during the first half of 2009,' the OECD said.
It said strains could arise from further mortgage-related losses, deeper disruptions in the US housing market or a US recession. The report said that housing prices were decelerating and were actually falling in about half the OECD members, threatening to depress a willingness on the part of consumers to spend money.
At the same time climbing commodity prices have heightened inflation worries. While oil demand has slackened in the industrialised world in the face of tepid economic activity, demand from high-growth emerging market nations, where fuel consumption is often subsidised, has been pushing up crude prices.
