OECD slashes growth

November 20, 2001 Posted: 1349 GMT

LONDON (CNN) -- The global economy appears to have slipped into a recession for the first time in 20 years, the OECD said on Tuesday.

"The terrorist attacks of September 11...have inflicted a severe shock to the world economy," the Organisation for Economic Cooperation and Development said in its twice-yearly Economic Outlook report.

"OECD-wide output is estimated to be contracting slightly in the second half of this year -- for the first time in 20 years -- and is projected to remain very weak in the first half of next year," said the Paris-based agency, whose membership of 30 countries accounts for the bulk of the planet's wealth.

It slashed its global growth target to 1 percent next year, compared with an earlier forecast of 2.8 percent. U.S. growth is projected to be 1.1percent this year, with growth of 1.2 percent in the first half offset by a 0.6 percent contraction in the second half.

The U.S. Federal Reserve's 10 interest rate cuts to 2 percent, their lowest level since the early 1960s, should be enough to turnaround the troubled U.S. economy, the OECD said. U.S growth will shrink by 0.1 percent in the first half of next year followed by a solid pick-up of 3.8 percent second-half growth, to give 0.7 percent growth for 2002 as a whole.

In the 12-nation euro zone, the OECD said it expected 1.6 percent growth this year and growth of 1.4 and 3.0 percent in 2002 and 2003 respectively, similar to IMF forecasts.

The OECD said it assumed the European Central Bank would cut interest rates by another 50 basis points as inflation eased back below two percent in the currency zone in 2002 -- and that it might need to cut more aggressively if things deteriorated. The ECB's key rate currently stands at 3.25 percent.

As for Japan, the economy was expected to shrink 0.7 percent this year and by 1.0 percent in 2002, with a return to growth in 2003 with a modest 0.8 percent expansion.

The Bank of Japan, with key rates barely above zero, had very little room to help activity by lowering credit costs and should focus on driving the yen lower through foreign exchange market intervention to fend off deflationary pressures, it said.

In general, the OECD sounded a positive message about the prospects for global recovery late next year, but emphasised that all forecasts were uncertain at this time.

"Assuming that household and business confidence turns up from current low levels, a significant rebound of activity should take place in the second half of next year," it said.

With companies across the globe slicing workforces, the OECD said it expected the U.S. jobless rate to leap to 6.2 percent in 2002 after 4.8 percent this year before easing back. The trend was similar elsewhere, with euro zone unemployment edging up to 8.9 percent next year from 8.5 this year.

--Reuters contributed to this report