Britain was the only G7 economy to be downgraded when the Organisation for Economic Cooperation and Development (OECD) revised its growth forecasts last week.
The OECD’s revised estimate says that the British economy will contract by 4.7% in 2009, compared with the 4.3% fall it forecast in June.
It expects overall growth for the G7 economies will fall by 3.7% in 2009, compared with a 4.1% decline it forecast in June, and says a global recovery will be “early but weak”.
The OECD also predicts that eurozone growth, supported by a strong recovery in France and Germany, will fall by 3.9% in 2009, compared with June’s estimate of 4.8%.
Meanwhile, new figures released last week by Eurostat suggest the European economy may be stabilising. Eurostat says Eurozone GDP fell by just 0.1% in the second quarter of 2009, compared with a first quarter decline of 2.5%. However, Eurozone unemployment reached a 10-year high of 9.7% in July, which is equivalent to 15.1m people without jobs.
Similarly, American umemployment has reached record levels, climbing to 9.7% in August.
The OECD says high and rising unemployment combined with low profitability and limited growth in labour income, spare capacity and ongoing correction in housing markets will continue to moderate demand and weaken the global recovery.
However, it highlights improvement in overall financial conditions and signs of stability in the British and American housing markets as positive indicators. Elsewhere, recovery in large emerging market economies, including 14% GDP growth in China, and potential acceleration in global trade are also good signs of growth.
The OECD says that while falling commodity prices and spare capacity have led to low headline inflation in all major economies, the recent rebound in commodity prices means the risk of sustained deflation is small outside Japan.
It says the weak recovery means interest rates are unlikely to rise until at least mid-2010, echoing the view expressed by Jean-Claude Trichet, the European Central Bank (ECB) president. The ECB left interest rates unchanged at 1.0% on Thursday. Analysts say the bank may not raise rates until the third quarter of 2010.