Growth weakening but no recession: OECD

Also projects that growth in G7 economies would remain less than 1% at in the second half of this year

Economic growth in much of the advanced world is near stagnation and set to

remain limp through the rest of the year, although a downturn on the scale of the last one appears unlikely, an international research group said Thursday.

The Organisation for Economic Cooperation and Development (OECD), said the recovery from the so-called Great Recession almost came to a halt in the second quarter of this year in many of its 34 members, including the United States and the euro area.

In its latest outlook, the Paris-based group said a number of factors had darkened the picture since its last report in May.

These included the recent gridlock over fiscal policy in United States, the euro area sovereign debt crisis, continued bank balance sheet problems, slowing trade flows and concerns about whether the existing economic policy tools can offset any further weakness.

“The risk of more negative growth going forward has become higher in some major OECD economies, but a downturn of the magnitude of 2008 and 2009 is not foreseen,” it said.

In Japan, growth was less negative than projected in the immediate aftermath of the March earthquake and subsequent nuclear disaster, it said.

But activity in China slowed in the course of the first half and manufacturing production there weakened.

The OECD projected that growth in Group of 7 economies excluding Japan would remain less than one per cent at annualised rates on average in the second half of this year.

It predicted an expansion in the United States of 1.1 per cent in the third quarter and 0.4 per cent in the fourth. For the three largest euro zone countries — Germany, France and Italy — the forecast was for 1.4 per cent in the third quarter and negative 0.4 per cent in the subsequent three months.

“The impact of the sovereign debt woes in Europe and the United States and the associated turbulence in stock markets over the summer have not yet fully fed through into the indicators underpinning the projections,” the report said.

Growth in Japan is expected to be buoyed by post-disaster reconstruction, though its effect should fade by year-end. And Germany and Italy are both likely to see contractions during one quarter of the second half.

But the report said that uncertainty surrounding the projections was particularly high.

The main risks in the second half include a possible intensification of Europe’s debt crisis; further balance-sheet problems for banks; additional businesses running down inventories amid weak consumption; and the risk that unemployment rates in some economies could become entrenched.

But it also said that the unwinding of temporary factors that had dampened growth in Germany — like the shutdown of nuclear plants — and in France, such as the effects of phasing-out car scrapping subsidies, “may prompt a sharper than projected rebound in activity in the third quarter.”

In addition, data on the federal budget had been better than expected so far this year in United States, it said.

The report said that official interest rates in most advanced economies should be kept on hold.

If in coming months signs emerge of enduring economic weakness, the OECD said rates should be lowered where there is scope.

Where there is no scope, other measures could include further central bank intervention in securities markets, even if that brings diminishing returns, it said. The governance of the euro area must still be improved and the capitalisation of banks in the region strengthened to stop contagion and restore confidence, the report said.

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