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OECD says growth outlook has got much worse

By Leigh Thomas

PARIS (Reuters) - The outlook for economic growth in developed countries has got much worse in the last three months, the OECD said on Thursday and urged central banks to keep rates low and be ready to pursue other forms of easing.

The latest estimates marked a sharp slowdown from the Paris-based organization's last forecasts in May but used different methodology so were hard to compare precisely.

The Organization for Economic Cooperation and Development forecast growth across the G7 group of major industrialized economies would average 1.6 percent on an annualized basis in the third quarter before slowing to just 0.2 percent in the final three months of the year.

"With respect to three months back the growth scenario looks much worse, one would say that growth is stagnating," said OECD chief economist Pier Carlo Padoan.

"We are witnessing a growth slowdown across OECD countries."

The slowdown would hit Germany particularly hard, according to the OECD's estimates, forecasting that Europe's biggest economy would see annualized growth of 2.6 percent in the third quarter before contracting 1.4 percent in the fourth.

The U.S. economy, meanwhile, would see annualized growth of 1.1 percent in the third quarter slowing to 0.4 percent in the fourth quarter.

The OECD, which is due to provide more complete forecasts later this year, warned that its latest outlook had an abnormally high margin of error due to exceptional uncertainty.

CENTRAL BANKS TO THE RESCUE

With the full impact of recent debt troubles in Europe and the United States still unknown, the OECD warned that risks were high that growth could prove even weaker although it ruled out a recession on the scale of the 2008-2009 financial crisis.

In light of the fast deteriorating outlook, the OECD said that central banks should keep interest rates on hold.

"If in the coming months signs emerge of the weakness enduring or the economy risks relapsing in recession, rates should be lowered where there is scope," the OECD said.

With U.S. and Japanese interest rates close to zero, the OECD said that central banks should consider, where needed, further interventions in securities markets and make strong commitments to keep interest rates low for an extended period.

The report came amid signs that central banks are concerned about the weaker outlook for growth.

The European Central Bank was meeting on Thursday and is expected to signal a change in policy direction, halting a rate rise cycle as the euro zone debt crisis weighs on the economy.

The Bank of England was also meeting on Thursday with investors watching for signs of more stimulus to help the ailing economy.

Many countries would not be able to look to the government for fiscal stimulus because of their weak finances, the OECD said, but urged those in a stronger position to consider more easing if the slowdown proves long-lasting.

(Reporting by Leigh Thomas; Editing by Anna Willard)

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