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Last Updated: Thursday, 6 December 2007, 10:36 GMT
OECD warns of economic slowdown
Production line at US carmaker Ford
The outlook for the US economy is set to worsen
The US economy will slow sharply in the first half of 2008, the OECD has warned, leading to weaker world growth.

The 30-nation group of top economies said that the risks of further financial turmoil could not be ruled out, but it expected recovery later.

The OECD said that strong company profits and high employment should moderate the effects of the slowdown.

But it said that rising commodity prices posed a dilemma for central banks who had cut interest rates.

US: 2.0% (2.2%)
Eurozone: 1.9% (2.6%)
UK: 2.0% (3.1%)
Japan: 1.6% (1.9%)
Real GDP growth, 2008 (2007)

The think tank for the world's leading economies said that the most likely outcome was a "relatively benign" scenario where growth "picked up speed" in the second half of 2008 and early 2009, especially in the United States.

Downside risks

But it warned that there were still a number of "downside risks" whose magnitude were hard to gauge.

  • The financial turmoil that began over the summer has not yet played itself out
  • Further declines in housing markets could hit more countries
  • There is uncertainty as to how sensitive households and businesses might be to the higher cost and lower availability of credit
  • Commodity prices could continue to rise
  • There could be further sharp adjustments in exchange rates

The OECD said that prompt reaction by central banks and governments had mitigated the immediate effects of the crisis, but that economic policy makers should "prepare for the contingencies that could arise".

These include making sure that inflation was under control by anchoring inflation expectations, and keeping a lid on budget deficits during a time of economic slowdown.

This implied a hold on further interest rate cuts, especially as tougher credit conditions and exchange rate appreciation outside the US has led to an effective tightening of monetary conditions.

US slowdown

The OECD said the contraction in the US housing market and the wider problems in the financial markets would have a negative impact on the US economy in the short-term.

It has revised down its expectation of US growth to an annualised rate of just 1.3% in the fourth quarter of 2007, and 1.1% in the first quarter of 2008, compared with a 2.75% growth rate in the first three quarters of the year.

But it says that growth will recover to 2.2% by the beginning of 2009, and 2.8% by the end of 2009.

The OECD also says that to some extent Europe has "decoupled" its growth from the US, with the euro area expected to slow from 2.6% growth in 2007 to 1.9% in 2008.

Housing worries

The OECD says it is not clear whether house prices will fall in other countries as much as in the US, and how much effect that will have on the general economy.

However, it says that in those countries where it has been easy to withdraw money through equity withdrawal - especially the UK, Canada, and Australia - a house price fall will have a bigger effect on consumption and the real economy.

It is forecasting a slowdown in UK economic growth from 3.1% in 2007 to 2% in 2008, mainly as a result of a housing slowdown. The OECD expects UK interest rates to be cut in the coming months.

But it warns that the growing budget deficit will need attention, with further cuts in spending.

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