Colin Barr

Following the money in banking, economics, and Washington

OECD calls recession 'unlikely'

September 9, 2010: 9:41 AM ET

The cross-your-fingers-and-hope-there's-no-downturn crowd got a little bigger Thursday.

The global economic slowdown isn't likely to end in a double-dip recession, the Organization for Economic Cooperation and Development said in an otherwise dour report.

Not the only uncertain one

The OECD said in its latest economic assessment that growth has lost momentum, particularly in debt-laden developed countries. It cut its annual growth forecast for the second half of this year in the seven richest economies to 1.5% from 1.75% four months ago, with the deepest cuts coming in Europe.

The OECD said it believes the slowdown is "temporary," but admitted that the jury is still out. It contends that private investment is so weak that it's unlikely to drop further, though it conceded that soft housing markets, stretched consumer balance sheets and troubled banks still pose substantial risks to recovery.

"It is not yet clear whether the loss of momentum in the recovery is temporary – as implied by the balance of strengths and fragilities discussed above – or whether it signals greater underlying weaknesses in private spending at a time when policy support is being removed," the group said.

The OECD added that additional monetary stimulus from central bankers such as the Federal Reserve may be necessary to fend off another recession. Fed officials have been openly grappling for the past six weeks with the question of whether and when to commit to additional purchases of Treasury bonds in a move they believe will undergird a private sector recovery.

"If the slowdown reflects longer‐lasting forces bearing down on activity, additional monetary stimulus might be warranted in the form of quantitative easing and commitment to close‐to‐zero policy interest rates for a long period," the OECD said. "Where public finances permit, planned fiscal consolidation could be delayed."

That seems like a bit of stretch at a time when Ireland and Portugal appear to have run out of such room. Still, the group reasons that all things considered, muddling through remains the most likely course.

The sharpest downgrades in the OECD forecast came in the three biggest European economies, Germany, France and Italy. The group's May projections saw output in these nations expanding around 2% in the second half of 2010, but the latest forecast slashes that expectation to just 0.5%.

The OECD had seen the United States economy expanding at a 2.7% clip in the second half, but it now expects 2% growth in the third quarter and just 1.2% in the fourth.

The group also noted that the trade recovery is losing momentum, and that the trade imbalances that helped set the stage for the financial crisis are still in place, though not quite as severe as they were three years ago.

Even so, it said it believes the wobbly recovery won't be derailed by the uncertainty that has been cited in recent weeks by Fed chief Ben Bernanke (above) and countless other commentators.

"The uncertainty is caused by a combination of both positive and negative factors," said OECD Chief Economist Pier Carlo Padoan. "But it is unlikely that we are heading into another downturn."

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Colin Barr
Colin Barr
Senior Writer, Fortune

Colin Barr has covered finance for Fortune.com since November 2007. Previously he was a writer and editor for TheStreet.com, winning a 2006 Society of American Business Editors and Writers award for "The Five Dumbest Things on Wall Street," and for Dow Jones Newswires. He is a 1991 graduate of Penn State and lives in Port Washington, N.Y., with his wife Meena Bose and their two kids.

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