Economic Recovery Stagnates in Most Major Industrialized Economies

While economic growth in major industrialized economies has slowed to a near halt, growth remains strong in emerging economies, though at a more moderate pace, according to new analysis from the Organization for Economic Co-operation and Development.

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Growth in G7 economies, with the exception of Japan, is expected to remain at an annualized rate of less than 1% in the second half of 2011. In the U.S., debate over fiscal policy has been has been hurting consumer confidence, while the sovereign debt crisis spreading across Europe and the fact that governments now have fewer options to boost growth are both driving business and consumer confidence downward.

Of course, some countries are taking serious fiscal and structural reform measures in order to buck the negative trend. President Obama will speak later today on his plan to stimulate job growth in the United States. Japanese growth is expected to remain higher than that of other G7 economies as the country successfully continues reconstruction efforts following the March 11 earthquake and tsunami.

Meanwhile, inflation in emerging markets seems to have finally peaked, which will allow for some policy easing. With investment levels in many OECD countries still well below historical averages, the time is ripe for renewed corporate spending if uncertainty abates.

The OECD’s recommendation is that central banks keep policy rates at present levels, as the European Central Bank announced it would do earlier today. It also recommends that they lower rates if economic recovery stalls, and keep them low until economic recovery can get back on track. Other monetary policy responses the OECD recommends include further central bank interventions in securities markets and withdrawing monetary tightening in emerging economies.

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The OECD also recommends countries take credible steps to curtail debt, both through consolidation plans and structural reforms that will encourage growth. In so doing, it is the OECD’s contention that room will then be created for a short-term fiscal stimulus. The process of banks’ capitalization should be accelerated, and support for their short-term funding needs should be addressed.