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OECD says recovery slowing, urges policy caution

PARIS (Reuters) - Global recovery looks to be slowing more than expected as growth weakens in rich economies, and stimulus should be extended or stepped up if the slowdown endures, the OECD said on Thursday.

The Organization for Economic Co-operation and Development forecast growth across the G7 group of major economies to average an annualized 1.4 percent in the third quarter and 1.0 percent in the fourth, down from 3.2 and 2.5 percent in the first and second quarters respectively.

"We're seeing a slowdown in the recovery which is more or less generalized," OECD chief economist Pier Carlo Padoan told Reuters Insider TV, although he saw no evidence of a relapse into recession in any major economy at the moment.

"We're not seeing a double-dip now," he said.

The OECD forecast annualized U.S. growth rates of 2.0 and 1.2 percent in the third and fourth quarters, after 1.6 percent in the second quarter and 3.7 percent in the first.

"Recent high-frequency indicators point to a slowdown in the pace of recovery of the world economy that is somewhat more pronounced than previously anticipated," it said.

"It is not yet clear whether the loss of momentum in the recovery is temporary ... or whether it signals greater underlying weaknesses in private spending at a time when public support is being removed," the Paris-based organization said.

For Germany, France and Italy combined, the OECD forecast expansion to plunge to an annualized 0.4 and 0.6 percent respectively in the third and fourth quarters of the year, from 5.1 percent in the second quarter.

Germany's economy, which grew 2.2 percent quarter-on-quarter in the second three months of 2010 -- close to a startling 9 percent annualized rate -- would expand just 0.7 percent in annualized terms in the third quarter, it predicted.

Others were more optimistic about Europe's largest economy.

Germany's Institute for World Economy (IfW) think tank raised its 2010 growth forecast on Thursday, saying it now expected the German economy to grow by 3.4 percent this year, up from a previous forecast for 2.1 percent made in June.

For Japan, the OECD forecast 0.6 and 0.7 percent annualized GDP rises in the third and fourth quarters respectively, mildly better than a second-quarter figure of 0.4 percent annualized.

For Britain, the OECD predicted 2.7 and 1.5 percent annualized growth in Q3 and Q4 after a second-quarter rise of 4.9 percent annualized versus the previous quarter.

POLICYMAKERS SHOULD TREAD CAREFULLY

The OECD's latest forecasts were limited to forecasting for the G7 countries, but it did say growth remained robust in large emerging market economies.

On the downside, it said there was a risk weak house prices and high unemployment could restrain domestic consumption.

"If the ongoing slowdown is temporary, the appropriate policy response would be to postpone withdrawal of monetary stimulus for a few months while maintaining planned budget consolidation," Padoan said.

"On the other hand, if the slowdown reflects longer-lasting forces bearing down on activity, additional monetary stimulus may be needed in the form of quantitative easing and commitment to close-to-zero policy interest rates for a long period," he said.

Asked if the European Central Bank was conducting the appropriate policy, Padoan told Insider the strategy of preparing for a slow withdrawal of monetary stimulus while seeking fiscal consolidation was right as long as the slowdown was temporary.

He also said countries which had room for maneuver could afford to ease the pace of fiscal cutbacks.

"Where there's space, the fiscal consolidation could be slowed down a bit," he said.

"Now that world trade is somewhat decelerating, Germany is being hit in the sense that it's having slower growth than previously," Padoan said when asked if Germany was particularly vulnerable because of its reliance on exports.

For OECD statement, click on www.oecd.org

(Reporting/writing by Brian Love; editing by Patrick Graham/Mike Peacock)

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