OECD Forecasts Economic Weakness Through Year-end
The OECD forecasts weak economic acitivity through the end of the year: “In the United States, uncertainty as to the extent of weakness hinges importantly on how rapidly the effects of temporary fiscal stimulus will fade. In the euro area and its three largest economies, as well as in the United Kingdom, activity is foreseen to remain broadly flat. And in Japan only a partial bounce-back from the 2nd quarter fall in GDP is expected.”
The OECD lowered its forecats of year-average economic growth for 2008 in the Euro area, the UK, Japan and Canada, but raised the number for the US to 1.8% from 1.2 % forecast in June. As a result its forecast of overall OECD growth remains unchanged from June at 1.4%.
Financial market turmoil, housing market downturns and high commodity prices continue to bear down on global growth while at the same time evolving rapidly.
Other highlights from the OECD’s latest interim assessment:
- Banks appear to have recognized most of the losses and write-downs related to sub-prime based securities. 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. The eventual depth and extent of financial disruption is still uncertain, however, with potential further losses on housing and construction finance being one source of concern.
- The downturn in housing markets is still unfolding, with reduced credit supply likely adding to pressures. US house prices continue to fall, threatening further defaults and foreclosures that may again depress prices and boost credit losses. As regards construction, however, there are some hints of eventual stabilisation with permits and sales of new homes having ceased to fall and inventories of unsold houses coming down. In Europe, downturns in prices and construction activity appear to be spreading beyond Denmark, Ireland, Spain and the United Kingdom, with sharply lower transaction volumes likely a precursor of downturns elsewhere.
- The price of oil has fallen from peaks reached around the middle of the year in response to slower demand growth and record production from OPEC. Oil supply conditions remain tight, however, contributing to volatile prices. Prices of other commodities – notably food – appear to have steadied at high levels. Food commodity prices may ease in the period ahead as droughts end in some food-exporting countries and as higher food production comes on stream.
In the United States, underlying inflation is high but appears not to have drifted up further and widening slack will be a disinflationary force, the OECD says. “With headwinds from financial constraints, this appears to vindicate existing expansionary policies. Underlying inflation has been rising steadily in the euro area for some time, suggesting that capacity pressures need to be reduced. Hence, at this moment, there is little need to change existing policy stances. Should a need to tighten or loosen the macro policy stance become apparent, monetary policy would be the preferred instrument. In Japan, different indicators of underlying inflation send mixed signals and deteriorating business sentiment, as well as the need for a buffer against the risk of deflation, argue for keeping monetary policy on hold.”
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