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Last Updated: Wednesday, 5 September 2007, 10:56 GMT 11:56 UK
US economy 'heading for 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 second half of the year and the risk of it going into recession cannot be ruled out, the OECD has warned.

The 30-nation group of top economies said the global financial fallout from the current US sub-prime mortgage crisis would continue for some time.

But it said US consumers remained resilient while Europe was unlikely to be as badly affected as the US.

Uncertainty over the size of sub-prime losses has caused stock market turmoil.

Financial risk

The OECD said the contraction in the US housing market and the wider problems in the financial markets it has triggered would have a negative impact on the US economy.

It is now forecasting economic growth to fall to 2% in the third quarter and 1.5% in the fourth quarter from the 4% recorded between April and June.

What we had not forecast was the extent of the spread of this financial risk beyond the boundaries of the US
Jean-Phillipe Cotis, OECD

"We are looking at a slowdown in the US economy which is quite significant," said the OECD's chief economist Jean-Philippe Cotis.

The OECD admitted the recent retrenchment in global credit markets, which has forced central banks in the US and Europe to pump billions into the banking system to enhance liquidity, had taken it by surprise.

"What we had not forecast was the extent of the spread of this financial risk beyond the boundaries of the US," Mr Cotis said.

The OECD said it expected sub-prime related turbulence to continue for some time and could not fully assess the likely impact of these problems on the wider financial system.

It would also not be drawn on whether this would tip the US economy into recession.

European picture

Previous slumps in the housing market have often led to recession, Mr Cotis said.

But he stressed that circumstances could be different this time around because of the continued strength of household spending in the US.

"So far consumption has remained resilient despite the contraction in real estate markets," Mr Cotis concluded.

Houses for sale in the UK
The housing problems in the US may not be repeated in Europe

"There may not be a pronounced recession despite this difficult period."

Turning to Europe, Mr Cotis said its leading economies were less vulnerable to a housing-led slowdown.

This was because their mortgage markets had fewer structural "imbalances" while inflationary pressures were generally lower.

As a result, the transatlantic economic impact of a US slowdown would not be as severe as that following the dotcom crisis at the start of the decade.

"We don't think there will be the same extent of contagion in Europe as in 2001," he said.

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