OECD Warns Of European Slowdown
Lionel Laurent, 09.05.07, 9:02 AM ET
forbes.com
LONDON - The Organization for Economic Co-operation and Development cut its growth forecasts for the Euro area on Wednesday, citing "ominous" risks from the turmoil in the world's financial markets. But the worst is yet to come, with the real blow to growth on its way next year.
"Prospects going forward are now clearly less buoyant and more uncertain," said Jean-Philippe Cotis, economist for the Organization for Economic Co-operation and Development (OECD), in his interim report released Wednesday. He added that previously strong economic momentum and "forceful" central bank actions had not led to a dramatic revision of growth forecasts, but the downside risks were now "ominous."
The Paris-based organization now expects Euro area gross domestic product for 2007 to grow 2.6%, 0.1 percentage points less than the 2.7% figure it forecast in May. Germany's growth forecast slipped 0.3 percentage points to 2.6%, from 2.9%, while France's dropped 0.4 percentage points to 1.8%, from 2.2%.
"We already thought growth was going to slow because of the strong euro and because of high interest rates," said Howard Archer, an economist with Global Insight. He said that the current crisis in the world's financial markets, sparked by a worldwide equity sell-off in August and followed by massive injections of liquidity from the world's central banks, would have its true impact on growth in 2008.
The major European indexes fell slightly on Wednesday afternoon, with the London FTSE 100 down 49.70 points, or 0.8%, to 6,327.10 points, Frankfurt's DAX down 52.74 points, or 0.7%, to 7,669.03 points and Paris' CAC 40 down 55.10 points, or 1.0%, to 5,617.62 points.
OECD's Cotis said that central bankers should not let the current crisis influence them into bailing out "excess risk taking," adding that they should continue to focus on inflation and economic activity. He said that inflationary pressures in the Eurozone "would seem to warrant some further tightening once financial market conditions have steadied."
But for the moment it looks likely that both the Bank of England and the European Central Bank will hold key interest rates this week, as they stay in "wait and see" mode to gauge the full extent of the American subprime mortgage market fall-out in Europe. Already major financial institutions such as Germany's IKB (other-otc: IKBDF - news - people ) and France's BNP Paribas (other-otc: BNPQY - news - people ) have experienced problems with the reluctance of investors to buy into asset-backed securities. (See "Germany's Banks Come Clean")
The OECD was founded in 1948 to help cope with postwar reconstruction in Europe. It currently has 30 members, including the United States, Japan and Turkey. |
