Page last updated at 20:02 GMT, Wednesday, 4 June 2008 21:02 UK

OECD warning of sharper slowdown

By Steve Schifferes
Economics reporter, BBC News, at the OECD in Paris

The falling dollar will lift US exports, says the OECD

The Organisation for Economic Co-operation and Development (OECD) has warned that the global economic slowdown may last longer than expected.

It added that the UK economy was headed for a significant downturn that put government spending plans in danger.

The OECD said UK growth would slow to 1.8% this year, and to 1.4% in 2009.

Three factors were hurting the UK and global economy, the OECD said, pointing to weakening property markets, a global credit crisis and high commodity costs.

"Our forecast is more negative than the one we produced six months ago," said Jorgen Elmeskov, acting chief economist at the OECD.

"Some of the factors we were worried about, such as financial market turmoil, have actually come about.

"So we expect growth to be weak throughout the whole of 2008."

The comments came in the OECD's twice-yearly economic forecasts.

According to the report, real gross domestic product (GDP) growth in the OECD area is set to slow from 2.7% in 2007 to 1.8% in 2008, and 1.7% in 2009, it says.

Tricky dilemma

Mr Elmeskov said that there were "three main forces acting on the world economy at the moment: financial turmoil, the collapse of the housing market, commodity prices which have increased rapidly".

He said that the high energy and commodity prices posed a dilemma for the world's central banks and made it more difficult for them to take appropriate action to deal with the economic slowdown.

Real GDP growth chart

The OECD warns that in the US, growth will be at a virtual standstill, with its economy growing at just 0.3% in the first half of this year.

But it says that the falling US dollar will help boost US exports, leading to higher growth in 2009.

However, conditions in the euro area are expected to get worse as the full effects of the credit crunch take hold.

It sees the eurozone as growing by 1.7% in 2008 and 1.4% in 2009.

And the slowdown in both Europe and the US, as well as the housing slump, is likely to hit growth in the UK, where economic growth is also expected to slow to 1.4% in 2009.

This is bad news for UK Chancellor Alistair Darling, who will be facing an election by 2010 and who has been counting on improved growth to help meet a growing budget deficit.

Financial sector

However, despite the problems, the OECD says it thinks that the worst phase of the global credit crisis may have passed after central banks pumped billions of dollars into the banking system.

It adds that the risk of a financial melt-down has diminished somewhat, following the dramatic central bank rescues of Bear Stearns in the US and Northern Rock in the UK.

Jagdish Bhagwati of Columbia University gives his views on the global economy.

But it warns that further financial turbulence could reduce OECD growth by another 0.3%.

And it says that inflationary pressures - led by food and oil prices - are also building up in OECD countries, reducing the room for manoeuvre for cutting interest rates.

And in some countries - notably the US and the UK - the lack of fiscal discipline means that there is little scope for increased government spending to help overcome the slowdown.

It warned that policymakers would have to tighten fiscal policy in order to keep the budget deficit under control and meet borrowing rules.

"While ongoing economic weakness in 2009 would argue against fiscal restraint, the government's options have been limited by excessively loose fiscal policy in past years when economic growth was strong," the OECD says.

Even slower?

The OECD also includes growth estimates for the major emerging market countries such as Brazil, India and China, with whom it is now establishing a closer working relationship.

Although we may have seen the worst of the financial crisis, the lagging effects on the world economy are likely to be severe
Denis Snower,
Kiel centre for the World Economy

Their estimates suggest that these countries will be the main engines of world growth over the next two years, with only a modest slowdown despite the reduction in demand in their main Western markets.

"I expect the world economy to slow even faster than the OECD forecast," said Denis Snower, director of the Kiel centre for the World Economy.

"Although we may have seen the worst of the financial crisis, the lagging effects on the world economy are likely to be severe."

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