• Home
• /
• Business

US economy set for soft landing: OECD

“Output has slowed to below its potential growth rate, reflecting a dramatic contraction in house building,” the Organisation for Economic Cooperation and Development said in its twice-yearly report on the global economy.

“As this flattens out, GDP (gross domestic product) growth should progressively return to trend.”

To date, the decline in the US housing market had not significantly affected the economy as a whole, which was forecast to grow by 2.1 percent this year and 2.5 percent in 2008, the OECD said.

But it warned that the economy nonetheless faced a risk “if problems in the sub-prime mortgage market lead to wider financial-market distress.”

Sub-prime mortgage lenders provide loans to borrowers with poor credit histories.

“Increased inflationary pressures could post more of a policy dilemma in the United States than elsewhere, with significant upside risks to inflation combined with downside risks to activity,” the report added.

The US economic slowdown could even turn out to be broader than expected at present, OECD analysts said, and “might involve a mild form of stagflation,” a combination of stagnating economic activity and inflation.

Inflation was forecast to reach 2.6 percent this year and 2.2 percent in 2008, higher than the comparable OECD averages of 2.1 and 2.0 percent.

Unemployment was tipped to remain stable at 4.6 percent this year before edging higher to 4.8 percent in 2008.

As a result, the US Federal Reserve might consider raising its main interest rates, the OECD suggested.

“Should core inflation remain high and unemployment stay low, then a further tightening would be appropriate,” the report said.

It’s overall tone was nonetheless generally positive for the United States, noting that “sustained job and labour income growth should provide the basis for a progressive return to economic normality, while excess supply of housing is being gradually worked off.”