A new recession stalks some rich countries and the euro zone crisis could deepen, the OECD warned today as it urged most central banks not to raise, and maybe to cut, interest rates.
The OECD insisted on the urgency for the euro zone to apply rescue action agreed in July and to tighten financial discipline. Banks had to strengthen their capital because of their exposure to euro zone debt, it also stressed.
The OECD revised sharply down its growth forecasts for the rest of the year for Group of Seven (G7) rich industrialised countries and expected at least one quarter of contraction in Germany and Italy.
The warning of shrinkage in Germany contrasted starkly with recent data showing dynamic, albeit possibly slowing, activity in the German economy.
The organisation gave different emphasis to the threat of recession in the French and English versions of its forecasts. In French it said: "The possibility of recession is not ruled out in some big economies in the OECD." However, the English version read: "The risk of more negative growth going forward has become higher in some major OECD economies."
"But a downturn of the magnitude of 2008-2009 is not foreseen," both versions added.
"Policy rates in most OECD economies should be kept on hold,'' the OECD said. "If in the coming months signs emerge of the weakness enduring or the economy risks relapsing in recession, rates should be lowered when there is scope,' it added.
The US economy would grow by 1.1% in the third quarter of this year from the previous quarter, and by 0.4% in the fourth quarter, the OECD said. The euro zone was set for third quarter growth of 1.4% but switching into a downturn of 0.4% in the last quarter.
The Organisation for Economic Cooperation and Development stressed the high level of uncertainty mainly because of the impact of debt problems in the US and in Europe. A recession is generally considered to occur if quarterly growth is negative from output in the previous quarter, twice in a row.
In a particularly grim interim assessment, the OECD said the Japanese economy could grow by 4.1% but would then show zero growth in the fourth quarter. The main driving force in the euro zone, Germany could grow by 2.6% in quarter three but was set to contract by 1.4% in the fourth quarter.
For France the estimates were 0.9% and 0.4%, for Italy -0.1% and then 0.1%, for Britain 0.4% and 0.3% and for Canada 1% and 1.9%.
"The impact of the sovereign debt woes in Europe and the United States and the associated turbulence in stock markets over the summer have not yet fully fed through into the indicators underpinning the projections,'' today's report warned.
