OECD Warns Against Interest Rate Cuts Amid Ongoing Downturn

The world economy will suffer its slowest growth for six years in 2008-09 as the global credit crunch and house price slump cause the giant US economy to stall, the Organization for Economic Cooperation and Development (OECD) said today.

In its twice-yearly economic outlook, the Paris-based club of the world's 31 wealthiest nations warned central banks around the world to hold off further interest rate cuts because of the inflationary perils arising from surging food and oil prices.

The OECD said the combined growth of its members would be just 1.8% this year and 1.7% in 2009, well down from its 2.3% and 2.4% forecasts last December.

Its acting chief economist, Jorgen Elmeskov, said the world economy had gone through a "perfect storm" of the credit crunch and jump in inflation over the past year, meaning several quarters of weak growth lay ahead before recovery set in next year.

"We are seeing an adjustment to an inflationary shock from oil and food prices but it's not going to turn into an ongoing problem because we have perfect confidence that the world's central banks will not allow that to happen," he said.

The OECD thinks the US economy will contract in the current quarter and grow a meagre 1.2% in 2008 as a whole and 1.1% in 2009, half the pace it had expected in December.

But Elmsekov said President George Bush's tax cuts and big interest rate reductions by the Federal Reserve would stimulate a rapid recovery by mid-2009, in which case the Fed should be prepared to raise rates as rapidly as it had cut them to prevent another asset price bubble building.

Elmeskov said it was possible the credit crunch was past its peak but warned: "This is far from a foregone conclusion". He said the downturn in many housing markets around the world triggered by the crunch could last longer and get worse, particularly in the US, UK, Ireland, Denmark and Spain.

The OECD is expecting slower growth in the 15-member euro zone, shaving its forecasts to 1.7% this year and only 1.4% next year as it feels the effects of the US slowdown, tighter credit and slower exports because of the rising euro.

The watchdog raised its growth forecast for Japan this year to 1.7% but cut next year's estimate to 1.5%. Elmeskov said Japan should at last find a permanent exit from the deflation that has dogged it since the early 1990s.

Although China is not an OECD member, the organization said it expects growth to slow marginally this year to 10% but urged the Chinese authorities to "continue working to reduce overheating pressures" as inflation remains stubbornly above 5%.

At the OECD conference, the head of Bush's Council of Economic Advisers, Ed Lazear, dismissed the idea that the rest of the world could "decouple" itself from the US slowdown.

"It is difficult to argue that the rest of the world is less connected to the US and not more connected," Lazear said.

He hinted that the half-year forecasts his council would release later this month would be weaker than those made in November but insisted the slowdown was not a recession and the US would recover.

"These are tough days for the United States but the growth (slowdown) is a temporary phase," he said.