OECD says worst yet to come for eurozone

Published by rudy Date posted on January 16, 2009

The worst is yet to come for the eurozone economy, which faces a contraction this year, with growth tailing off even more sharply than expected, the head of the OECD said on Wednesday.

“We have not seen the worst (of the downturn yet) … with further deceleration in prospect, “said Angel Gurria, OECD secretary general, as the grouping of developed economies unveiled a report on the region.

“The housing market continues to contract and … (there is a reduction) in demand for European exports,” he said.

On the positive side, “further falls in inflation are likely in coming months and we expect the ECB (European Central Bank) to reduce interest rates further,” he added.

The OECD believed that the ECB still has room to cut interest rates even though they have been brought down sharply in the past three months to 2.5 per cent from 4.25 per cent to battle the global financial and economic crisis.

The ECB meets on Thursday and is widely expected to cut lending costs by half a percentage point to 2.0 per cent but several senior central bank officials have expressed concern about cutting rates to such low levels where they may no longer have any real impact.

In its report, the Paris-based economic research agency called for “more centralised and integrated” cross-border financial supervision in the eurozone.

It urged governments to be careful with their financial sector intervention as they confront an acute economic downturn, making sure that imprudent money managers are not rewarded.

Economic growth in the countries sharing the euro is projected to have fallen sharply from 2.6 per cent in 2007 to 1.0 per cent in 2008 and to be a negative 0.6 per cent this year before edging up to 1.2 per cent in 2010.

European Union data last week showed that the eurozone economy entered its first official recession in the third quarter, when it shrank 0.2 per cent after contracting by the same amount in the second quarter.

The slump marks the first recession, which economists usually define as two consecutive quarters of contraction, suffered by the bloc since it was formed in 1999.

“Today’s priority for all member states is to find responses to the financial crisis and ensure their swift implementation,” the Organisation for Economic Cooperation and Development argued.

The study noted a steady decline in eurozone inflation since July, which it said “could well drop below 2.0 per cent during the course of 2009.”

OECD economist Nigel Pain said the organisation “doesn’t exclude deflation in the very short term if the fall in inflation is more rapid than expected.”

The ECB’s inflation target is for a rate just under 2.0 per cent.

The OECD said that with sluggish growth and moderate wage and price pressures “room for further easing of monetary policy would emerge,” adding that if output were to decline more rapidly, “deeper interest rate reductions could prove necessary.”

The financial crisis brought on the by collapse of the US sub-prime or high risk mortgage sector has stunned markets in the eurozone and elsewhere, leading to calls for stricter financial oversight.

The OECD said it was therefore important for the eurozone to achieve a “coherent system of financial supervision.”

It put forward two options – a single European financial supervisor or a European system of supervisors, with a central agency working together with national supervisors.

“Either option has the potential to improve the monitoring and containment of systemic risks within the rapidly growing and increasingly integrated European financial market,” the report said.

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