OECD slashes forecasts for US, euro zone

THE ORGANISATION for Economic Co-operation and Development (OECD) has slashed its economic output forecasts for the US, Japan and euro zone, and said the 30-nation OECD area appeared to have entered recession.

"OECD projections point to a protracted downturn with GDP likely to decline by 1/3 of a per cent in 2009 but the uncertainties are large," the think tank said.

After a sharp slowdown in the fourth quarter, when the world's largest economy was expected to contract by 2.8 per cent, US gross domestic product was forecast to fall 0.9 per cent in 2009 compared to 1.4 per cent growth in 2008.

Both Japan and the euro zone were also projected to slide into recession. The OECD forecast that Japanese GDP would drop 1 per cent in the fourth quarter and 0.1 per cent in 2009, while euro-zone output would shrink 1 per cent and 0.5 per cent in the same periods.

The OECD's forecast of an annualised 0.4 per cent contraction for Japan in July to September would already put the world's second-largest economy into recession. This is much more bleak than the market consensus.

The OECD acknowledged that great uncertainty surrounded its forecasts. "The distribution of risks around the projection is wide. In 2009, these risks are skewed on the downside," it said in a statement with the projections.

Risks included financial conditions taking longer to return to normal than expected, further bank failures, and emerging markets being hit harder than expected.

The projections saw a sharp drop in inflation, but OECD economists saw only a slight threat of deflation, apart from in Japan, where it was forecast to set in next year.

"I would not see that [deflation] as something that has a high probability, but it's one of these outcomes on the lower end of the probability distribution," Joergen Elmeskov, director of the OECD's economic policy studies branch, said.

After a series of big rate cuts by central banks around the world in recent weeks, the OECD said it was time for some governments to provide an extra boost in the form of fiscal stimulus, despite already heavy public debt burdens.

"The need is probably larger in the countries where the scope for monetary easing is limited and where the automatic stabilisers are relatively weak, and that would be the US and Japan," Mr Elmeskov said.

"The need is perhaps less in the euro zone because there's still some ammunition left in monetary policy," he added.