Europe's economy is slowing more sharply than predicted, with Britain near recession, and the United States and Japan are faring little better, according to OECD forecasts on Tuesday. Inflation could ease because of a drop in oil prices and a tentative stabilisation in other commodity prices but the eurozone will have to live without the help of interest rate cuts in the meantime, said OECD chief economist Jorgen Elmeskov.
The US economy, where the current economic downturn in the industrialised world began, did better in the second quarter but is badly weakened by a housing slump that has yet to finish, the Organisation for Economic Co-operation and Development said.
"Financial market turmoil, housing market downturns and high commodity prices continue to bear down on global growth while at the same time evolving rapidly," the Paris-based agency, one of the world's main public forecasters, said in a statement.
"OECD short-term forecasting models point to weak activity through the end of the year." Still, the OECD chose not to use the word 'recession' to describe the situation in any of the countries it spoke of, even Britain, where it predicts the economy will contract in the third and fourth quarters, which would satisfy the definition of a recession.
The OECD raised its annual forecast for US growth to 1.8 percent from the 1.2 percent it had predicted in June, while it cut its prediction for the eurozone to 1.3 percent from 1.7 percent, and for Japan to 1.2 percent from 1.7 percent.
For the Group of Seven industrialised nations as a whole, its growth forecast for 2008 was 1.4 percent, unchanged from the projection it made in June. Elmeskov said, recession or not, Britain was basically stagnating, mainland Europe was "barely crawling" and the United States was looking sickly even if it got a mid-year lift from interest rate cuts and the government's pump-priming efforts.
Giving its view on the slowdown and how it might unfold in the coming months, the OECD said its forecast models suggested US growth of 0.9 percent in the third quarter and 0.7 percent in the final quarter, each time versus the previous one. They are annualised figures, which basically means something close to the real quarterly growth number multiplied by four, as is the routine way of reporting quarterly changes in gross domestic product in the United States.
For Japan, the OECD forecast third-quarter GDP growth of 2.4 percent and 1.4 percent in the fourth quarter, for the euro zone 0.4 percent and 0.8 percent, for Britain -0.3 percent and -0.4 percent and for Canada 0.8 percent and 2.0 percent.
Elmeskov said the OECD had been surprised by the size of the drop in second-quarter Japanese GDP and expected a rebound , notably given what was looking like a healthy rise in exports in the third quarter, especially to China. "Japan benefits from being located in the right neighbourhood," he said.
China and India were still growing at rates that put the G7 group to shame, even if they too had slowed a little, and demand from such fast-growing emerging market nations could provide a helping hand to export-oriented G7 countries, he said. Among the three biggest economies of mainland Europe, the OECD saw German GDP of zero and 0.1 percent in the third and fourth quarters, France at 0.2 percent and 0.6 percent, and Italy at zero and 0.6 percent respectively.
The OECD acknowledged its quarterly forecasts were subject to sizeable margins of error, especially in the case of Japan, where Elmeskov said its GDP estimates tended to be the most volatile. Elmeskov said the OECD's basic message was that the economy of the G7 - the United States, Japan, Germany, Britain, France, Italy and Canada - was "very weak". "Continued financial turmoil appears to reflect increasingly signs of weakness in the real economy, itself partly a product of lower credit supply and asset prices," it said.
The monetary policies being pursued by central banks at the moment were appropriate in current circumstances, the OECD said, referring primarily to the United States and euro currency zone where the European Central Bank sets rates for 15 countries.
The Federal Reserve has slashed US interest rates while the ECB's last move was a rise. Elmeskov defended the ECB's more restrictive strategy. "The ECB has been faced with a continuous tendency for updrift in inflation, not just something that's arisen over the past 5 or 6 months as the oil price spiked," he told Reuters.
"There's inflation momentum there that needs to get out of the system. "In some sense you can say that with a mandate to preserve price stability what can you do as a central bank? You have to accept some degree of slack in the economy in order to bring inflation back to what you define as price stability." Elmeskov said it was not clear at this stage how much a drop in oil prices and inflation as a result would boost household morale and spending after a year where their spending power has taken a serious hit from rising food and fuel prices.