Date: 09/05/07

OECD Sees Sharp U.S. Economic Slowdown

By GABRIELE PARUSSINI

PARIS (Dow Jones/AP) _ The U.S. economy faces a significant economic slowdown that should lead the U.S. Federal Reserve to ease interest rates, a senior official of the Organization for Economic Cooperation and Development said Wednesday.

"The housing sector is set to exert a longer- and more-potent-than-expected drag, and confidence has weakened in the U.S.," said OECD Chief Economist Jean-Philippe Cotis in a statement accompanying the think-tank's interim economic outlook.

"As a result, gross domestic product growth is projected to fall distinctly below potential during the second half of this year, following the strong rebound in the second quarter," he said. "There may be a case for some easing in the U.S. federal funds target rate."

The OECD's interim report also found that the U.S. subprime mortgage crisis has raised the downside risks to the global economy, but that it's still too early to say exactly what the impact will be.

"Downside risks have become more ominous, in a context where overall financial markets are likely to remain durably tighter," OECD Chief Cotis said. "There's still the risk of a credit crunch."

The U.S. subprime problems have roiled financial markets and forced major central banks such as the European Central Bank and the Fed to inject cash into the financial system in order to prevent a global liquidity crunch.

Despite inflation pressures in Europe, Cotis urged the ECB to hold off on an imminent increase in interest rates because of the liquidity shortage in interbank money markets. But, he said central banks should resume their own monetary policy as soon as the effects of the recent market turbulence have passed.

The OECD downgraded many of its 30 member countries' individual forecasts, including those in the United States and the euro zone, while sticking to its growth estimate for Japan.

Cotis said the OECD's latest forecasts don't take into account the recent turmoil in financial markets, which have cooled a number of sentiment indicators in Europe.

Looking ahead, the OECD said it was difficult to gauge how long the crisis would last, but urged a rethink about overseeing markets and rating debt.

"There may be a need for more encompassing supervision of U.S. subprime mortgage markets, with greater attention to non-bank originators, which have often evaded effective scrutiny," the report said.

The OECD pushed for more transparency in credit markets, where securitization has made risk assessment increasingly difficult for many investors, leading to a widespread loss of confidence.

Speaking to reporters afterward, Cotis said credit rating agencies must be "stricter and more probing" in their analysis of credit.

The OECD lowered its U.S. gross domestic product growth forecast to 0.5 percent for the third quarter and to 0.4 percent for the fourth quarter, from its May estimate of a 0.6 percent expansion in both quarters. Those estimates are quarter-to-quarter, and not directly comparable to the annualized growth estimates generally given by U.S. forecasters.

The OECD predicted euro-zone GDP growth of 0.6 percent in the third quarter, but lowered its growth estimate for the final quarter to 0.5 percent from 0.6 percent in its last report.

Cotis also said the strength of the euro appears to have peaked and that the situation is normalizing. That could help the European economy.

"Growth should pick up to around potential in the euro area, including the three largest economies, in the second half of the year," Cotis said.

The OECD said Japan's expansion would continue, driven by business investment, with high capacity utilization and profits. It forecast Japanese GDP would grow 0.5 percent on the quarter in the third and fourth quarters of the year.

Separately, the U.N. Conference on Trade and Development on Wednesday said in its flagship annual report that woes in the housing market will drag U.S. GDP growth to a modest 2 percent growth in 2007, compared with 3.3 percent last year.

Copyright 2007 The Associated Press.