The U.S. and rich nations in Europe need to take action to shore up confidence in their economies as their recoveries are set to stagnate or go into reverse, the Organization for Economic Cooperation and Development said Thursday.
The Paris-based watchdog for the world's most developed economies slashed its forecast for growth in the U.S. and the eurozone this year due to government belt-tightening and falling consumer and business confidence.
The agency's head economist said governments need to take urgent steps to restore confidence and break the vicious circle in which they are trapped.
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"We are seeing a huge drop in confidence both in business and households, which for us reflects perceptions that markets have about how policymakers are responding, both in long and short term," OECD Chief Economist Pier Carlo Padoan told the Associated Press.
The U.S. will grow by only 1.4 percent this year, the agency said, down sharply from a forecast of 2.6 percent only three months ago. The combined economies of Germany, France and Italy, the three largest members of the eurozone, will grow by under 1 percent this year, less than half the OECD's May forecast of 2 percent growth.
"This is quite a downward revision," Padoan said. "I would say the risk of having some negative growth figures as we go forward is much higher today (than in May)."
As a result, he said there was space for looser monetary policy -- either by cutting interest rates or using tools such as the Federal Reserve's program to buy bonds to stimulate the economy. If needed, he suggested governments with credible debt reduction plans could temporarily boost spending.
The starkly downbeat report comes the same day that President Barack Obama is scheduled to address Congress to pitch a $300 billion economic plan aimed at urgently creating jobs. The European Central Bank, meanwhile, is expected to signal a halt to its rate hike campaign later in the day.
The debate over whether -- and how -- to support growth is also expected to dominate the agenda of talks Friday among the financial leaders from seven of the world's most developed economies in Marseille.
In its update to the twice-yearly economic outlook report, the OECD forecast the U.S. economy will grow at only a 0.4 percent annualized rate in the fourth quarter, while in Europe, the three largest economies in the eurozone will contract by 0.4 percent in that period.
The OECD nevertheless said that "a downturn of the magnitude of 2008/2009 is not foreseen."
Padoan said that the steep cut to the U.S. outlook was caused by stagnating employment and a more severe pull back by over-indebted consumers than the OECD had forecast.
"The two things are not conducive to stronger confidence," Padoan said. "It's an interaction of factors which we think has kicked in because there was no visible progress."
"You have to break a vicious circle in a way," Padoan said.
The OECD economist said it was "extremely urgent" for Europe to implement changes agreed to in July to increase its bailout fund's flexibility, giving it the right to buy the bonds of financially weak governments, help recapitalize banks, and quickly loan money to countries before they get into a full-blown debt crisis.
"Governments and markets need to be reassured that Europe is serious on producing more progress in strengthening the European architecture," Padoan said.
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