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Economic recovery slowing according to OECD

The world economic recovery may be slowing faster than previously anticipated, according the OECD’s latest Interim Economic Assessment. Growth in the Group of Seven countries is expected to be around  1½ per cent on an annualized basis in the second half of 2010 compared with the previous estimate of around 1¾ per cent in the OECD’s May Economic Outlook.

The OECD says the loss of momentum in the recovery is temporary although uncertainty has increased. “The uncertainty is caused by a combination of both positive and negative factors,” said OECD Chief Economist Pier Carlo Padoan. “But it is unlikely that we are heading into another downturn.”

While consumer spending is set to remain weak, a combination of robust corporate profits and low business investment suggest that capital spending is unlikely to weaken further. Because inventories are now close to desired levels, a renewed depletion of stocks is also unlikely. Overall financial conditions have stabilised, the report notes, and growth remains strong in the major emerging-market economies.

Based on the most recent data, the OECD short-term forecasting models show that US GDP is expected to rise by 2.0% in the third quarter but then moderate to 1.2% in the fourth quarter of 2010. In Japan, GDP growth is forecast at 0.7% in the fourth quarter after 0.6% in the third.  As can be seen in the diagram below, UK growth is expected to be 2.7% in the 3rd quarter and 1.5% in the fourth.

This is quite surprising as the National Institute of Economic and Social Research (NIESR) has just said that GDP in the three months to August slowed sharply to 0.7% , compared to 1.3% in the three months to July.

According to the NIESR report, “The pace of economic growth may have softened in the three months to August, but is still a robust rate for the UK.” But it went on to say: “Unfortunately, the rate of growth will continue to decelerate over the coming months.”

Mr Padoan, of the OECD also said that the current stance of both fiscal and monetary policy should remain on course. If the slowdown in the recovery becomes entrenched, and the risk of downturn increases, additional monetary stimulus in the form of quantitative easing and keeping interest rates close to zero for a longer period may be necessary. Countries with more fiscal space could also delay plans for fiscal consolidation.

In fact, the Monetary Policy Committee of the Bank of England decided today that interest rates will remain at their record low of 0.5% for the 18th consecutive month. There was no change to the total of quantitative easing but some commentators feel that the £200bn limit is about to be increased over the next couple of months.

Posted in Bank of England, economic growth, GDP, Interest rates, Monetary Policy Committee, OECD

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