Subprime woes begin to tell on global economy

PARIS: The Organization for Economic Cooperation and Development lowered its forecasts for economic growth in the US and Europe and said they may be reduced further following the collapse of US subprime mortgages. “Downside risks have become more ominous,” Jean-Philippe Cotis, the OECD’s chief economist, said Wednesday in Paris.

The OECD trimmed its 2007 forecast for the US to 1.9% from a May figure of 2.1% and for the euro region to 2.6% from 2.7%. Cotis said deeper reductions were possible, noting Wednesday’s estimates didn't take into account the extent of the financial-market turmoil. The assessments by the OECD were the first since the US mortgage declines tightened bank lending, triggering concern that spending and investment will falter. Cotis declined to rule out the possibility of a recession in the US and said economic growth in Europe has peaked.

“There may be a case” for a quarter-point interest-rate cut at the US Federal Reserve’s meeting this month, to ease lending and maintain confidence, Cotis said. “It’s difficult to say” if the US economy is headed toward recession, he added. In the euro region, a rate increase by the European Central Bank may be “warranted” after markets “steady,” he said. “Inflationary pressures have mounted, and underlying inflation in Europe is continuing to accelerate,” Cotis said. “Still, in the current climate, it might be better to wait a bit until financial conditions normalise.”

The OECD lowered its 2007 forecast for the Group of Seven industrialised nations to 2.2% from 2.3%, with the estimate for France slashed to 1.8% from 2.2% and Germany’s to 2.6% from 2.9%. The OECD, which didn’t provide estimates for the global economy, publishes its semi-annual predictions in November.

European politicians downplayed the prospect of a slowdown, with French finance minister Christine Lagarde reiterating a growth fore-cast of about 2.25% this year and predicting a “strong” second half.

European Union monetary and economic affairs commissioner Joaquin Almunia said Europe’s economy should emerge largely un-scathed by the increase in borrowing costs. “Our economy is in a good position to overcome the uncertainty that has been generated,” he told the European Parliament Wednesday. The OECD held its growth forecast for Japan at 2.4%. Cotis said there was “no end in sight” to deflation pressures and recommended no change in BoJ policy.

The ECB and other central banks injected more than $350 billion of extra funds into money markets to smooth lending between banks af-ter the overnight lending rate in Europe shot up to 4.62%. The Federal Reserve on August 17 unexpectedly cut its discount rate, at which it makes direct loans to banks, by 0.5 percentage point to 5.75%. OECD monitors the world’s most developed economies and seeks to coordinate domestic and international policies.