PARIS (AP) - The U.S. and rich nations in Europe need to take action to shore up confidence in their economies as their recoveries are set to stagnate or go into reverse, the Organization for Economic Cooperation and Development said Thursday.
The Paris-based watchdog for the world's most developed economies slashed its forecast for growth in the U.S. and the eurozone this year due to government belt-tightening and falling consumer and business confidence.
The agency's head economist said governments need to take urgent steps to restore confidence and break the vicious circle in which they are trapped.
The U.S. will grow by only 1.4 percent this year, the OECD said, down sharply from a forecast of 2.6 percent only three months ago. The combined economies of Germany, France and Italy, the three largest members of the eurozone, will grow by under 1 percent this year, less than half the OECD's May forecast of 2 percent growth.
"This is quite a downward revision," OECD Chief Economist Pier Carlo Padoan told the Associated Press. "I would say the risk of having some negative growth figures as we go forward is much higher today (than in May)."
As a result, he said there was space for looser monetary policy - either by cutting interest rates or using tools such as the Federal Reserve's program to buy bonds to stimulate the economy. If needed, he suggested governments with credible debt reduction plans could temporarily boost spending.
In its update to the twice-yearly economic outlook report, the OECD forecast the U.S. economy will grow at only a 0.4 percent annualized rate in the fourth quarter, while in Europe, the three largest economies in the eurozone will contract by 0.4 percent in that period.
The OECD nevertheless said that "a downturn of the magnitude of 2008/2009 is not foreseen."
The interim update to the agency's last Economic Outlook in May comes one day before financial leaders from seven of the world's most developed economies meet in Marseille for talks on how to respond to growing threats to the economic recovery.
Padoan said that the steep cut to the U.S. outlook was caused by stagnating employment and a more severe pull back by over-indebted consumers than the OECD had forecast.
"The two things are not conducive to stronger confidence," Padoan said. "It's an interaction of factors which we think has kicked in because there was no visible progress."
"You have to break a viscious circle in a way," Padoan said.
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