OECD: U.S. Economy 'Moving Sideways'

MoneyNews
Friday, March 21, 2008

PARIS -- The Organization for Economic Cooperation and Development downgraded its economic forecasts on Thursday for the United States, the euro zone and Japan for the first half of 2008.
The OECD says the U.S. economy is now essentially "moving sideways."

Moreover, Europe and Japan do not have room to ease fiscal or monetary policy, the 30-nation group warned.

The OECD cut its growth forecast for first-quarter gross domestic product in the United States to 0.1 percent on the quarter and predicted GDP would be flat in the second quarter.

That assessment covers only the first half of the year, and the OECD did not provide comparative figures.

"The U.S. economy is now essentially moving sideways, if not contracting outright," the OECD said. "It may be premature to declare a recession, but with the pace of activity so far below potential, economic slack is widening rapidly."

Economists have been lowering their economic forecasts as the U.S. slowdown has spread elsewhere and as the credit crunch precipitated by the subprime crisis cuts deeper.

"The effects on demand are likely to be significant but are hard to gauge," the OECD said, adding that "share and housing prices declines, particularly in the U.S., are also holding back demand, with some lags."

The global housing cycle has turned for the worse, the group said, with the U.S. residential investment slump likely to shave about a percentage point from annual GDP growth this year as it did in the past two years.

It also said real household incomes are being squeezed by soaring energy and food prices. That is despite the fact that the euro zone and Japan have benefited from currency appreciation against the sagging U.S. dollar.

For the euro zone, the OECD now forecasts first-quarter GDP growth of just 0.5 percent, with no improvement in the second quarter, which is expected to show just a 0.4 percent gain.

"In the euro area, the deceleration has been less abrupt; but growth is set to remain on the low side of potential for some time, even though exports so far seem to hold up well in the face of euro appreciation," the group said.

For Japan, the OECD said the pace of underlying growth appears to be softening despite support from buoyant neighboring Asian economies. The organization expects first-quarter GDP to be up 0.3 percent and predicts a rise of 0.2 in the second quarter.

"The case for policy stimulus is stronger in the U.S. than in Europe or Japan, and both U.S. monetary and fiscal policy makers have already acted forcefully," the OECD said.

"In the euro area, by contrast, the near-term outlook for activity and inflation doesn't point to a need for stimulus, and automatic fiscal stabilizers will provide more support than in other regions," the OECD added, noting that "in Japan, there is limited scope for responding to greater weakness."

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