Slowdown Will Be Modest In Major Economies: OECD

Source : The Business Times, December 7, 2007

It expects activity to pick up by 2009 despite oil hikes, US sub-prime crisis

THE world's leading economies will suffer only a modest slowdown in growth next year with activity picking up again into 2009 despite the fallout from the US sub-prime mortgage crisis, high oil prices and other threats, the Organisation for Economic Cooperation and Development forecast yesterday.

The eventual fallout of financial turmoil on the real economy is hard to gauge, says the OECD.

But the OECD acknowledged risks that could upset this 'benign' baseline scenario for global growth.

US economic growth will slow from an expected 2.2 per cent this year to 2 per cent in 2008 but economic activity there will begin picking up as early as the second quarter of next year, the OECD said in its latest Economic Outlook. Likewise, growth in Japan and the euro area will slow only slightly next year while overall OECD growth will decelerate to 2.1 per cent from an expected 2.3 per cent for 2007.

These robust predictions follow a World Bank report which revised upwards projections for growth across Asia (excluding Japan), on the assumption that growth in the world's major economies will not be hit hard by the sub-prime crisis.

They contrast with a Congressional Budget Office warning this week that the US is at an 'elevated risk' of economic recession.

This year will be the fourth year of above-trend growth in the OECD area, said forecasters at the Paris-based economic think- tank. But they noted that 'growth is now moderating', partly because of a cooling in housing markets. 'Adding to the downside risk, the financial turmoil that began over the summer has not yet played itself out, with the eventual fallout on the real economy still hard to gauge'.

Recession is not on the cards for the US, according to the organisation's projections. OECD economist Randall Jones said in a video briefing from Paris last night that the early response by US monetary authorities to the sub-prime loans crisis had lessened the chances of a serious economic slowdown there while the falling dollar was serving to boost US exports. He also cited continuing labour market strength in the US as a factor for optimism.

Yet another positive factor is that the sub-prime lending crisis and related financial market turbulence has come 'after a prolonged global expansion when corporate balance sheets and labour markets were unusually strong, as well as due to the prompt action of central banks', the OECD said in its report.

'Some re-pricing of risk was overdue and that risk is now better reflected in the cost of capital,' it said. 'This may lead to a more discriminating allocation of capital and so enhance longer-term growth prospects.'

The housing market slowdown is now evident in most OECD economies, which dampen their growth prospects, 'but it is expected to act as a severe brake in only a few', the Economic Outlook said, citing the US and Britain in particular where falling house prices and a drop in mortgage equity withdrawal will 'contribute to some further slowdown in demand'.

But the risks surrounding the baseline growth scenario for next year and 2009 have a 'long tail to the downside', the report suggested. 'This reflects, in particular, that there could be after-shocks to financial markets. It also reflects uncertainty about how sensitive households and businesses might be to high costs and lower availability of credit.

'It is possible as well that a greater number of countries are vulnerable to a pronounced downturn in house prices or housing investment, particularly if financial turmoil were to disrupt mortgage markets more than currently seems to be the case, or if the experience of other countries leads to a reassessment of house prices by buyers and sellers.'