OECD lowers US growth outlook

03/20/2008

By Delphine Strauss
FINANCIAL TIMES
Published: March 20 2008 10:31 | Last updated: March 20 2008 15:10


Advanced economies are “not sheltered from financial turmoil” and economic prospects have deteriorated faster than was expected as recently as December, the Organisation for Economic Co-operation and Development said on Thursday.

The Paris-based international organisation for advanced economies said the effects of financial turmoil, the turning of the global housing cycle and squeezed incomes from “soaring” energy and food prices were “unlikely to fade soon”.

It cut its forecast for US growth in the first quarter of 2008 to a mere 0.1 per cent and predicted growth would grind to a halt in the following three months, saying recent data suggested “that the US economy is now essentially moving sideways, if not contracting outright”.

Jørgen Elmeskov, OECD acting chief economist, told a press conference that if investment in US residential property continued to slide at its current rate, by the start of next year “housing construction would be in the deepest slump since our records began” in 1960.

“The case for policy stimulus is stronger in the United States than in Europe or Japan,” he said, endorsing the Federal Reserve’s drastic interest rate cuts as well as the US decision to offer a fiscal stimulus.

He judged that European economies were faring better, although growth seemed likely to be at the low end of potential for some time. The strong euro, lowering import prices, would help moderate inflation without a need for higher interest rates.

However, the OECD said the near-term outlook in the euro area “does not point to a need for a stimulus” while fiscal policy would automatically provide more support to growth than in other regions.

Inflation above “comfort levels” in many economies appears likely to limit policymakers’ scope to counter a slowdown. “Short-run trade-offs between inflation and growth may have changed in recent years, casting some doubts on the exact extent to which subdued growth will moderate inflation pressures,” the OECD said.

The OECD’s forecasts for UK growth were surprisingly strong, suggesting quarterly growth would remain constant at 0.6 per cent until the middle of the year. If that pace were sustained until the end of the year, growth would overshoot even the relatively optimistic government forecast issued in last week’s budget report.