Europe Economy Hardhit, Britain Shrinking, US Feeble: OECD

Source : The Business Times, September 2, 2008

PARIS - Europe's economy is slowing harder than predicted and Britain is nearer recession than the other big countries of a region where the economy is close to flat on its back, according to OECD forecasts published on Tuesday.

The US economy, where the current economic downturn in the industrialised world began, did better in the second quarter but is also seriously weakened by a housing downturn that is still unfolding, the Organisation for Economic Co-operation and Development (OECD) 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,' said the OECD, which nonetheless chose not to use the word 'recession' to describe the situation in any of the countries it spoke of.

The OECD raised its annual forecast for US growth from one it had published in June, to 1.8 per cent from 1.2 per cent, while it cut a previous prediction for the euro zone to 1.3 per cent from 1.7 per cent, and for Japan to 1.2 per cent from 1.7 per cent.

For the Group of Seven (G7) leading industrialised nations as a whole, its annual growth forecast for 2008 was 1.4 per cent, unchanged from the projection it made last June.

For the second half of 2008, Britain was the only one of the G7 industrial powers forecast to contract in both the third and fourth quarters - the general benchmark in economics being that a two consecutive quarters of shrinkage is a recession.

OECD chief economist Jorgen Elmeskov said that, recession or not, Britain was basically stagnating, mainland Europe was doing only marginally better and the United States was also looking sickly even if it got a mid-year lift from the pump-priming efforts of the government and central bank, which has cut interest rates.

'I think the distinction between being or not being in recession is a bit for the birds,' Mr Elmeskov said in an interview.

'Is a small decline in GDP really that much worse than a small increase? - I think not.'

Britain leads race to bottom
Giving its view on the slowdown right now and how it might unfold in the coming months, the OECD said its forecast models suggested US growth of 0.9 per cent in the second quarter and 0.7 per cent 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 per cent and 1.4 per cent, for the euro zone 0.4 per cent and 0.8 per cent, for Britain -0.3 per cent and -0.4 per cent and for Canada 0.8 per cent and 2.0 per cent.

Mr Elmeskov said the OECD had been surprised by the size of the drop in second-quarter Japanese GDP and expected a rebound of sorts there, notably given what was looking like a healthy rise in exports in the early stages of the third quarter, notably to China.

'Japan benefits from being located in the right neighbourhood,' he said.

Among the three biggest economies of mainland Europe, the OECD saw German GDP of zero and 0.1 per cent in the third and fourth quarters, France at 0.2 per cent and 0.6 per cent and Italy at zero and 0.6 per cent respectively.

The OECD acknowledged that its quarterly forecasts were subject to sizeable margins of error, especially in the case of Japan, where Mr Elmeskkov noted that GDP estimates tended to bounce around the most.

He said that the basic message as far as the OECD was concerned was that the economy of the G7 club of industrialised nations 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,' he said in a statement accompanying the new forecasts.

Thumbs up for central banks
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 (ECB) sets rates for 15 countries.

The Federal Reserve has slashed US interest rates while the ECB's last move was a rise.

Mr Elmeskov defended the ECB's more restrictive strategy in the interview with Reuters.

'The ECB has been faced with a continuous tendency for updrift in inflation, not just something that's arisen over the past five or six months as the oil price spiked.

'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.' -- REUTERS