PARIS, Nov 20: The US economy is probably in recession and will contract further in the first half of 2002 before picking up less than a year after terrorist attacks slammed already sluggish activity, the OECD said on Tuesday.

The heightened state of uncertainty and aversion to risk caused by the September 11, attacks seem likely to lower activity significantly in the second half of 2001 and the first half of 2002,” the Organisation for Economic Cooperation and Development said in its semi-annual Economic Outlook.

The US economy, which had been growing by more than 5.0 per cent in the second quarter of last year, had slowed sharply owing to a stock correction and increased interest rates, but began showing signs of recovery by August.

The attacks had ripped the recovery scenario apart, and it is estimated that the economy has now fallen into recession.

Yet even with a contraction in the second half of this year, economic activity in the United States in terms of real gross domestic product (GDP) should increase by 1.1 per cent in 2002.

For 2002, that figure should be as a whole modestly lower, at 0.75 per cent, the report said.

The US economy could then gather steam towards the end of next year, it added, but the figures showed that this year and next the US economy would trail behind the euro zone, overtaking it in 2003.

With activity projected to pick up toward mid-year, 2002 may see growth through the year of about 2.75 per cent, it said.

In June, the OECD Outlook had forecast US growth this year of 1.7 per cent, down from an earlier estimate of 3.5 per cent, and predicted growth in 2002 of 3.1 per cent.

In 2003, the OECD now expects the US economy to expand by 3.8 per cent.

The 30-country organistion said on Tuesday that the terrorist attacks had dealt a severe shock to the world economy, and OECD-wide output is now expected to contract slightly in the second half of this year the first time this has happened in 20 years.

A significant rebound in the United States should take place in the second half of 2002 if household and business confidence recover from their current levels, the OECD said.

The outlook is unusually uncertain at this point, given the range of possible reactions to the terrorist attacks, the report warned.

US monetary policy has responded quickly to the drop in activity, and the Federal Reserve still had room to reduce interest rates further, the report noted.

Activity was supported by the aggressive easing of monetary policy from January onward, which contributed to resilient residential investment as mortgage rates fell, it said.

The rapid easing in monetary and fiscal policies should ensure that growth resumes by mid-year (2002), as security concerns dissipate, inventories bottom out, and household and corporate balance sheets improve.

But sub-par growth is expected to rapidly generate labour-market slack, with the unemployment rate projected to rise to around 6.25 per cent in 2002.

A stream of lay-off announcements, the jump in the unemployment rate to 5.4 per cent in October, and the continued high level in unemployment claims indicate that the labour market is deteriorating rapidly.

The budget deficit, meanwhile, would balloon owing to major tax cuts passed in the spring and an emergency $40 billion package implemented immediately following the terror attacks.

The Administration and Congress also appeared willing to provide further stimulus, and the projection assumes that addition fiscal measures totalling $90 billion (cumulatively) over 2002 and 2003 are enacted.

Combined with the cyclical fall-off in revenues, this leads to a projected federal government budget deficit in calendar year 2002.

The overall balance is projected to move to a deficit of $120 billion next year, a shift of nearly $300 billion, or 2.75 per cent of GDP, in just two years.

The European Central Bank seems likely to cut its interest rates by a further half percentage point by early next year, the OECD indicated on Tuesday.

Such a cut, which would reduce the ECB’s main refinancing rate to 2.75 per cent, would be linked to a decline in inflation back below the ECB’s medium-range target for euro-zone inflation of 2.0 per cent, it said.

And it said the ECB might need to ease by more than half a point.—AFP