PARIS - AFTER months of turmoil on financial markets and fears about recession in the United States, the OECD sent a reassuring message to industrialised countries on Thursday: growth is slowing, but don't panic.

The influential Paris-based organisation said the world economy had been hit recently by a series of 'shocks,' from falling equities and credit problems to high oil prices and softening housing markets.

Strained but won't buckle

'Although near-term growth has been revised down virtually everywhere in the OECD area, the baseline scenario depicted ... is actually not that bad in view of recent shocks,' said the OECD's acting chief economist, Jorgen Elmeskov.

The Organisation for Economic Cooperation and Development (OECD), a government-funded economics body grouping 30 industrialised nations, issued the forecast in its latest 'Economic Outlook' report.

Growth of the OECD economy, which includes North America, most of Europe, Japan and Australia among others, would be 2.7 per cent this year and 2.3 per cent next.

The figure for 2008 was a sharp downwards revision from a previous forecast of 2.7 per cent, made in May, and the prediction of growth in the United States was also slashed to 2.0 per cent from 2.5 per cent.

No US recession

Crucially however, the US economy, the world's biggest, would avoid recession despite weakness in the housing market, where house prices and construction are falling after a surge in home loan defaults.

'Accelerated adjustment in the US housing sector that will drag down growth to low levels in the near term, but will not trigger a recession and will only modestly push up unemployment,' Mr Elmeskov said.

The downwards revision of growth projections is in line with action by private sector economists and the International Monetary Fund, which cut its forecast for world 2008 growth by 0.4 percentage points to 4.8 per cent in October.

The Washington-based institution has warned of another downward revision as turmoil on global financial markets continues.

The OECD also said that their main, generally benign scenario could be subject to revisions if housing market difficulties intensified or financial market turmoil continued unabated.

Interest rates
On interest rates, the OECD urged central banks to stay on hold and praised moves either to cut borrowing costs - in the United States for example - or refrain from raising rates - such as the European Central Bank.

The Bank of Japan should keep rates on hold, with a 'durable exit from deflation' the overriding priority.

In Britain, the OECD advised a quarter-point cut in interest rates this month and a further easing in the first half of 2008.

Protectionism

The OECD, a policy forum for industrialised countries which promotes globalisation, free markets and competition, also warned about the dangers of protectionism amid stalling efforts to complete a new global trade deal and growing fears about sovereign wealth funds.

The Doha round of World Trade Organisation talks are deadlocked with no breakthrough in sight, despite the hopes of WTO director general Pascal Lamy of an agreement before end-2008.

Sovereign wealth funds are investment funds set up by major exporting countries, notably China and Middle Eastern oil producers, to invest their reserves in financial assets.

They are becoming bigger in scale and are increasingly looking at foreign companies and shares.

The OECD noted proposals in Germany, the United States, Canada and Japan for greater screening of foreign takeovers to check for national security issues that would justify blocking sovereign funds.

'While national security issues are important, and there is an economic issue of public entities part-owning private business, there is a danger that the climate for international investment will deteriorate,' the report said.

The key source of uncertainty going forward is the US housing market and the possibility of further turmoil on financial markets.

An increase in defaults by high-risk, or subprime, homeowners has led to falling house prices in the US as well as losses of billions of dollars for banks and investment funds across the world.

The banks lost money through investments in complex mortgage-backed securities whose value was linked to home loan repayments by subprime borrowers.

When defaults increased, the value of these securities collapsed and banks immediately restricted lending practices, raising fears of a credit crunch in which companies and consumers were unable to borrow money.

The OECD observed that lending practices had been tightened in many OECD countries, mostly in the US and Britain and to a lesser extent in Japan, but that the fallout from this had so far been contained.

'This could change if turbulence does not gradually fade as expected or even turned into a renewed bout of market tremours,' the report said. -- AFP

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