OECD Cuts Growth Forecasts for U.S., Japan

The Organization for Economic Cooperation and Development slashed its growth forecasts for the U.S. and Japan and said central banks around the world should be ready to ease monetary policy if economies weaken further.

The U.S. will grow 1.1 percent in the third quarter and 0.4 percent in the fourth, instead of the 2.9 percent and 3 percent predicted in May, the OECD said today in its interim economic assessment. Japan will expand 4.1 percent in the third quarter before stalling in the fourth, and the three biggest euro economies will grow 1.4 percent and then shrink 0.4 percent.

The predictions highlight the global slowdown the day that President Barack Obama will set out plans to revive growth in the world’s largest economy and the European Central Bank and the Bank of England conduct monthly policy meetings. Group of Seven finance ministers will also discuss ways to revive growth when they gather tomorrow in Marseille, France.

“Policy rates in most OECD economies should be kept on hold,” the OECD Chief Economist Pier Carlo Padoan wrote in the report. If signs of economic weakness emerge, “rates should be lowered where there is scope. Where there is not such scope, other measures could include further central bank interventions in securities markets, even at diminishing returns, and strong commitments to keep interest rates low,” he said.

Margins of Error

The OECD cautioned that the uncertainty around its forecasts is “unusually large,” particularly for Japan and the U.S. The various forecasts had margins of error that ranged from 1.1 percentage points to 2.7 points.

Central banks around the world are refocusing on supporting growth. Yesterday the Bank of Canada said there is a “diminished” need for it to raise interest rates, Sweden’s Riksbank abandoned a planned increase and the Reserve Bank of Australia signaled it is prepared to keep rates on hold.

Fears of a renewed global recession have caused stocks to tumble around the world and forced Japan and Switzerland to intervene to stop their currencies appreciating as investors seek havens.

ECB President Jean-Claude Trichet will probably resist calls to cut the benchmark interest rate today and may opt instead to increase the supply of cash to euro-area banks as the region’s debt crisis worsens, a Bloomberg News survey indicated. Policy makers meeting in Frankfurt will keep the key rate at 1.5 percent, according to all 57 economists in the Bloomberg survey said.

U.K. Rates

Bank of England policy makers, meanwhile, may maintain the U.K.’s benchmark interest rate at a record low, according to all 57 economists in a Bloomberg News survey. A separate poll shows the central bank will keep its bond buying plan unchanged. Goldman Sachs Group Inc. and Citigroup Inc. say policy makers will resume asset purchases by November.

The OECD favors monetary stimulus at a time when most developed countries are fighting to limit their levels of public debt.

“The space for fiscal policy to react depends on the state of public finances, the ease at which government debt can be funded” and the underlying strength of the economy, the OECD said. “Countries with limited fiscal space have restricted scope for fiscal easing and some have to tighten amid cyclical weakness,” it added.

The Germany economy will expand 2.6 percent in the third quarter and shrink 1.4 percent in the fourth, the OECD predicts. Italy will shrink 0.1 percent in the three months through September and grow 0.1 percent in the final three months, the forecasts showed.

The U.K. will grow 0.4 percent and 0.3 percent, while France will expand 0.9 percent and 0.4 percent. Canada’s expansion will be 1 percent and 1.9 percent in the two quarters, the OECD said.

To contact the reporter on this story: Mark Deen in Paris at markdeen@bloomberg.net.

To contact the editor responsible for this story: Craig Stirling at stirling1@bloomberg.net.

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