PARIS (MNI) – Growth in the G7 economies is likely to slow more
than previously expected to an annualized rate of around 1.5% in the
second half of this year, and it is unclear how long this may last, the
chief economist of the OECD said Thursday.

If the loss of momentum in the global recovery is temporary, as the
balance of risks suggests, it may enough to postpone the unwinding of
monetary policy supports “for a few months” while pursuing fiscal
consolidation, Pier Carlo Padoan argued in the OECD’s interim economic
outlook.

“On the other hand, if the slowdown reflects longer-lasting forces
bearing down on activity, additional monetary stimulus might be
warranted in the form of quantitative easing and commitment to
close-to-zero policy interest rates for a long period,” he advised.
“Where public finances permit, planned fiscal consolidation could be
delayed.”

In any case, central banks need not worry about the recent uptick
in inflation, as second-round effects from rising commodity prices and
tax hikes should be minimal, he suggested. Indeed, in contrast to some
emerging economies, “near-term expectations indicate a continued
moderation of underlying inflation in most of the major OECD economies.”

Ahead of the OECD’s more comprehensive Economic Outlook in
November, the interim forecasts point to a marked slowdown in growth in
Britain, Germany and France in the second half and probable stagnation
in Italy. US growth is seen picking up slightly in 3Q, then waning in
4Q. Japan would see only a marginal recovery from the abrupt slowdown in
2Q.

However, the margins of error are quite wide for most countries,
owing to the “great uncertainty in the outlook arising from a
combination of weaknesses and strengths,” Padoan cautioned.

Household consumption looks vulnerable to ongoing deleveraging,
housing market prices and job insecurity, he said, warning that weak
activity and tensions in sovereign debt markets could also rattle
financial markets and consumers.

On the upside, the economist suggested that low investment levels
and “robust” corporate profits should put a floor under fixed-capital
outlays in the near term. With inventories near target, there appears
little risk of a “renewed rundown of stocks”.

“Moreover, although different financial markets have moved in
different directions, overall financial conditions in OECD countries
have stabilised, although some indicators warrant caution, including the
cost of insurance against default, which remains high for banks,” he
said. “Growth remains robust in the large emerging-market economies.”

–Paris newsroom +331 4271 5540; Email stephen@marketnews.com

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