By Emma Vandore
Associated Press
Thursday, June 5, 2008

PARIS, June 4 -- The Organization for Economic Cooperation and Development foresees several quarters of weak growth for most of its 30 members, which include the United States, Japan and several European countries, and on Wednesday cut its economic growth outlook through next year.

While the "odds have improved" that the financial crisis has passed its peak, the effects on growth are likely to linger, the OECD said.

The combination of market turmoil, sharply higher oil and commodity prices and cooling housing markets has made it more difficult for policymakers to gauge the correct response, the Paris-based organization said.

Economic growth in the OECD's member countries will slow to 1.8 percent this year and 1.7 percent next year, it said in its twice-yearly outlook. That compares with its previous forecast of 2.3 percent in 2008 and 2.4 percent in 2009.

Weak economic growth in the United States is dragging down the overall forecast. The U.S. economy will grow just 1.2 percent this year and 1.1 percent in 2009, the OECD said. Economic growth in the euro nations and Japan will slow to 1.7 percent this year.

"OECD economies have been hit by strong gales over the recent past, and it will take time and well-judged policies to get back on course," said Jorgen Elmeskov, acting head of the OECD's economic department, in the report.

But the impact of rising oil prices combined with the market turmoil is difficult to estimate, the report said. This, combined with weakening growth and inflation, compounds the risk of policy errors.

Central banks could err "in both directions," the OECD said.

They should be especially mindful of the stagflation seen in the 1970s and 1980s, when loosening interest rates fueled inflation. At the same time, overly tight monetary conditions could hurt major economies when they need support.

The Federal Reserve started cutting interest rates aggressively in September to keep the housing slump and a severe credit crisis from triggering a recession. Rates in late April were cut to 2 percent, a four-year low. The OECD recommended that the Fed keep its policy stance "until the recovery takes hold."

The European Central Bank should "maintain interest rates at their current level" of 4 percent for the 15-nation euro region, the OECD said. The ECB has not moved rates since last June.

Economic growth in the euro region will drop to 1.4 percent in 2009 after 1.7 percent this year, the OECD said. In December, the OECD forecast growth of 1.9 percent this year and 2 percent in 2009.

In Japan, weakening growth and deflation risks "argue for keeping monetary policy on hold." The OECD raised its expectation for Japanese growth to 1.7 percent this year, from 1.6 percent, and reduced its forecast for 2009 to 1.5 percent from 1.8 percent.

In Britain and Canada, "large policy rate cuts are warranted" as the economies are "likely to experience sharper falls in output" than other OECD countries, the report said.

Britain is "more vulnerable" to the current crisis because of the importance of banking and financial markets to its economy, while Canada is being dragged down by its close links to the U.S. economy.

Associated Press writer Gaelle Faure contributed to this report.