September 2, 2008 | posted by Michael Baxter in UK economy, global economy |

The UK will contract by an annualised rate of 0.3 per cent in the current quarter and by 0.4 per cent in the final quarter of this year, said the OECD this morning. The UK is the only G7 member that the OECD reckons will see contraction during the period.

Of the other G7 members, Germany and Italy will move the closest to recession. The OECD is forecasting zero growth in this quarter for both countries, expects to see a sharp pick up in Italy, but predicts annualised growth of just 0.1 per cent for Germany in the final quarter of the year.

Japan is expected to be the star of the show, with 2.4 per cent annualised growth this quarter, while the US is expected to grow by 0.9 and 0.7 per cent in the third and fourth quarters.

The OECD said: “Banks appear to have recognized most of the losses and write-downs related to sub-prime based securities. Continued financial turmoil appears to reflect increasingly signs of weakness in the real economy, itself partly a product of lower credit supply and asset prices. The eventual depth and extent of financial disruption is still uncertain, however, with potential further losses on housing and construction finance being one source of concern.”

Still on the theme of house prices, it added: “The downturn in housing markets is still unfolding, with reduced credit supply likely adding to pressures. US house prices continue to fall, threatening further defaults and foreclosures that may again depress prices and boost credit losses. As regards construction, however, there are some hints of eventual stabilisation with permits and sales of new homes having ceased to fall and inventories of unsold houses coming down. In Europe, downturns in prices and construction activity appear to be spreading beyond Denmark, Ireland, Spain and the United Kingdom, with sharply lower transaction volumes likely a precursor of downturns elsewhere.”

In recent weeks three respected economic groups have predicted a recession for the UK. First off it was the British Chambers of Commerce, then Capital Economics, but the OECD is the real biggy – it has an annual budget of 342 million euros – not bad for economic pondering.

What is especially worrying is that the other two predictions for recession were applied to next year. So, if the OECD and Capital Economics are right, the downturn could be on course for lasting four or even six quarters.