(AFP) – Sep 5, 2007

PARIS (AFP) — The OECD lowered its growth forecasts for the US and eurozone economies on Wednesday and warned that world prospects were "clearly less buoyant" because of financial market instability.

The Paris-based economics body delivered a pessimistic diagnosis as it updated its previous forecasts from May, saying that the full impact of the US housing crisis and related problems in financial markets could not yet be measured.

The new projections for growth were based on backwards-looking second-quarter data and chief OECD economist Jean-Philippe Cotis suggested that further revisions were probable.

The May forecasts "were not revised that much," he said, adding: "Year averages mainly reflect past developments and prospects going forward are now clearly less buoyant and more uncertain.

"Downside risks have become more ominous, in a context where overall financial market conditions are likely to remain durably tighter."

The Organisation for Economic Cooperation and Development marked down its forecasts for the G7 as a whole, with eurozone powerhouses France, Germany and the United States predicted to be much weaker than previously expected.

The combined Group of Seven economies will grow by 2.2 percent this year, compared with a previous forecast of 2.3 percent, while the US economy will grow by 1.9 percent instead of 2.1 percent.

The French economy is now forecasted to expand by 1.8 percent instead of 2.2 percent, while Germany was marked down to 2.6 percent instead of 2.9 percent with Italy down to 1.8 percent from 2.0 percent.

The eurozone as a whole would grow by 2.6 percent instead of 2.7 percent.

The forecast for the Japanese economy was stable at 2.4 percent, while Britain and Canada were upgraded to 3.1 percent and 2.7 percent respectively.

The OECD is an influential Paris-based institution with a membership of 30 leading developed countries. It does research for its member countries and issues advice to policymakers.

Cotis had suggestions for the European Central Bank and the Federal Reserve, which are set to meet this month to discuss monetary policy in light of recent market turmoil.

The ECB, which meets on Thursday, should "wait and see" before deciding to raise its benchmark interest rate, he said, while the Fed had reason to consider a cut.

It was widely assumed in early August that the European Central Bank would raise its main lending rate, but recent turmoil on financial markets has led most analysts to predict no change.

The Federal Reserve, meanwhile, is expected to cut its main lending rate this month, with Cotis arguing that "there may be a case for some easing in the US federal funds target rate."

Global financial markets were in turmoil last month and are making only a tentative recovery now amid broad fears about the impact of the US housing market, particularly problems with high-risk "subprime" borrowers.

A defaults crisis has raised alarm that US consumer spending will be hit and has caused financial difficulties for banks and investment funds which have lost money linked to US home loans.

Central banks around the world have been injecting cash into the banking system to forestall a credit crunch, which appeared likely as banks moved to cover their losses and reduce their exposure to the US market.

A credit crunch would hit growth because it restricts credit to borrowers such as companies and investors.

A crisis appears to have been averted, but access to credit is now more difficult as banks tighten lending practices and raise their lending rates.

"To date, swift and forceful central bank action has helped contain the ensuing financial market turbulence," said Cotis.

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