ECONOMIC prospects in Europe are now clearly less buoyant and more uncertain, says an OECD interim assessment released on Wednesday.

Briefing the media on the assessment report the Organisation’s chief economist, Jean-Philippe Cotis warned that downside risks have become more ominous, in a context where overall financial market conditions are likely to remain durably tighter.

Since March 2003, the OECD has presented a brief overview of the near-term prospects in the major OECD economies between each issue of the Economic Outlook. This interim assessment is not seen as a full update of the biannual Economic Outlook projections, since it rests on a more limited information set, has a shorter horizon and covers a much smaller number of economic variables and countries. However, it is believed to help evaluate to what extent the latest Economic Outlook projections for the larger economies, are still on track.

The assessment said the turnaround in the US housing market and the woes in its sub-prime mortgage segment were highlighted as a pivotal element of the global business cycle in the May 2007 OECD Economic Outlook, and have since triggered a more general reassessment of risks.

To date, swift and forceful central bank action has helped contain the ensuing financial market turbulence. While it is too early to gauge to what extent the re-pricing observed so far – and possible further financial adjustments – will affect prospects for activity, it has happened at a point in time when world economic momentum was still strong.

Hence, the May 2007 OECD growth projections for the year as a whole are not revised that much in the reassessment. However, year averages mainly reflect past developments and prospects going forward.

Still, activity decelerated in the second quarter in the euro area at large and in most of its economies. While consumer confidence is fairly elevated, consistent with receding unemployment, retail sales have remained subdued. Business sentiment has been dented by the financial turmoil, but expectations are still fairly upbeat.

Accordingly, growth should pick up to around potential in the euro area, including the three larger economies, in the second half of the year. Nevertheless, the peak of the euro area growth upswing now seems to lie behind. Rising underlying inflation pressures in the euro area, partly related to the evaporation of labour market slack, would seem to warrant some further tightening once financial market conditions have steadied and the recovery develops as expected.

According to the assessment in the United States, durable goods orders and household spending were up going into the third quarter, and profit margins are ample, albeit declining. However, the housing sector is set to exert a longer and more potent than expected drag, and confidence has weakened. As a result, GDP growth is projected to fall distinctly below potential during the second half of this year, following the strong rebound in the second quarter. All in all, the growth estimates, the assessment hopes would err on the upside, since it has not yet been possible to fully evaluate the negative impact of credit market turbulences on economic activity. In any event, consumer resilience will be tested by mortgage rate resets, tighter credit standards, weaker collaterals and slower job creation.

Despite a deceleration in the course of the first half of 2007, the expansion in Japan is expected to continue. Although it weakened in the second quarter, business investment should be an important driver, with high capacity utilisation and profits. Household consumption has slowed but should be supported going forward by much-improved labour market conditions.

In addition, the negative contribution from stockbuilding in recent quarters suggests that in the near future inventory accumulation should add to growth. The major central banks generally face an economic outlook characterised by scant spare capacity and unemployment rates close to or below their structural levels, as well as high energy prices and rapidly rising food prices.