OECD cuts US economic growth forecast, recession not ruled out

FE Team | Published: September 06, 2007 00:00:00 | Updated: February 01, 2018 00:00:00

DUBLIN, Sept 5 (Reuters): The Organisation for Economic Cooperation and Development (OECD) Wednesday reduced its forecast for US economic growth and recommended a rapid cut in interest rates to limit the fallout from a housing and mortgage market slump that has sparked global financial market turmoil.
In an update to its economic forecasts for major industrial nations, the Paris-based OECD also said interest rates should not be raised for the moment in Japan or the 13-country euro currency zone.
It said it was impossible at present to evaluate the potential damage which broader financial market turmoil could add to the direct impact of a sharp downturn in US housing and a defaults crisis in the subprime mortgage market there.
"Downside risks have become more ominous," the OECD's chief economist, Jean-Philippe Cotis, said in a statement.
The OECD was not for now predicting US recession but was not discounting the possibility either, he added in an interview with the news agency.
He recommended that the US Federal Reserve reduce its key interest rate by a quarter of a percentage point this month to shore up growth, but without going so far as to give foolhardy investors the idea that public authorities would always be there to bail them out by cutting the cost of credit.
He presented updated GDP forecasts for several countries and said US growth was expected to be 1.9 per cent this year rather than 2.1 per cent forecast previously, and that growth in third and fourth quarters would be much weaker than a surprisingly strong showing reported for the April-June period.
"Recent developments have revealed serious imperfections in the functioning of US housing markets and, more broadly, in credit markets worldwide," Cotis said.
The US housing market downturn is widely regarded to have set in two years ago but the troubles caused by rising interest rates on already high-cost loans to poor, or subprime, borrowers surfaced later, recently triggering fears of a wider US slump and global credit crunch.
"Our diagnosis is a slowdown," Cotis told the reporter, conceding that the downturn was bigger than the OECD had expected. "We cannot rule out a recession," he added.
The OECD forecast third-quarter growth of 0.5 per cent in GDP quarter-on-quarter, which is roughly 2 per cent annualised, and a subsequent 0.4 per cent for the fourth quarter, which equates to about 1.6 per cent in standard US data publications.
Those predictions were on the high side, with large margins of error and an as yet unquantifiable hit from market turmoil that could potentially push either quarter to zero growth or even a contraction, Cotis said.
In Europe, growth remained relatively dynamic, and the case for further rises in ECB rates for the Eurozone was valid, but not until it became clearer how the gyrations in fragile and fear-riven financial markets would pan out over time, he said.
"For now, 'stay put'," he said of ECB rate policy ahead of a Thursday meeting of the euro zone's central bank, which has been steadily raising rates since December 2005 as the economy of the region began to pull out of the doldrums.
His advice was broadly similar for the Bank of Japan, which has for years had to worry about deflation rather than the risk of inflation that the primary concern of central banks in much of the rest of the world.
The OECD's forecasts for growth in 2007 as a whole were held at 2.4 per cent for Japan and trimmed minimally for the euro area, to 2.6 per cent from 2.7.