Just before the Bank of England and European Central Bank were to announce their interest rate decisions, the OECD said: “Policy rates in most OECD economies should be kept on hold." - File photo

PARIS: A new recession stalks some rich countries and the eurozone crisis could deepen, the OECD warned on Thursday urging most central banks not to raise, and maybe to cut, interest rates.

“Growth is turning out to be much slower than we thought three months ago and the risk of hitting patches of negative growth going forward has gone up,” OECD Chief Economist Pier Carlo Padoan said.

In its latest analysis, the OECD insisted on the urgency for the eurozone to apply rescue action agreed in July and to tighten financial discipline.

To stop further contagion and restore confidence in the eurozone, banks had to strengthen their capital because of their exposure to eurozone debt.

Eurozone financial governance must also be improved, the OECD argued.

The OECD also urged emerging countries to withdraw monetary tightening as soon as inflation targets were met and allow for the appreciation of their exchange rates, noting that trade imbalances continue to widen.

The organisation revised sharply down its growth forecasts for the rest of the year for Group of Seven (G7) rich industrialised countries and expected at least one quarter of contraction in Germany and Italy.

The warning of shrinkage in Germany contrasted starkly with recent data showing dynamic, albeit possibly slowing, activity in the German economy.

The organisation gave different emphasis to the threat of recession in the French and English versions of its forecasts. In French it said: “The possibility of recession is not ruled out in some big economies in the OECD.” However, the English version read: “The risk of more negative growth going forward has become higher in some major OECD economies.” Both versions added: “But a downturn of the magnitude of 2008-2009 is not foreseen.”

Just before the Bank of England and European Central Bank were to announce their interest rate decisions, the OECD said: “Policy rates in most OECD economies should be kept on hold. The British bank held its rate.

“If in the coming months signs emerge of the weakness enduring or the economy risks relapsing in recession, rates should be lowered when there is scope.” It said: “The sovereign debt crisis in the euro area could intensify again.” The US economy would grow by 1.1 per cent in the third quarter of this year from the previous quarter, and by 0.4 per cent in the fourth quarter, the OECD said.

The eurozone was set for third-quarter growth of 1.4 per cent but switching into a downturn of 0.4 per cent in the last quarter. The Organisation for Economic Cooperation and Development stressed the high level of uncertainty mainly because of the impact of debt problems in the United States and in Europe.

A recession is generally considered to occur if quarterly growth is negative from output in the previous quarter, twice in a row.

Padoan said that the policy imperative for OECD countries in order to stave off recession was to rebuild confidence. Consumer and business confidence in major OECD economies, hurt by the eurozone debt crisis and political gridlock in the US, had weakened in recent months.

The report warned however that “the impact of the sovereign debt woes in Europe and the United States and the associated turbulence in stock markets over the summer have not yet fully fed through into the indicators underpinning the projections.”

In a particularly grim interim assessment, the OECD said the Japanese economy could grow by 4.1 but would then show zero growth in the fourth quarter.

The main driving force in the eurozone, Germany could grow by 2.6 per cent in quarter three but was set to contract by 1.4 per cent in the fourth quarter.—AFP