The outlook for the world economy has darkened because of instability in financial markets, the Organisation for Economic Cooperation and Development said yesterday as it cut its forecasts for growth on both sides of the Atlantic.

The think-tank, based in Paris, issued a gloomy prognosis and said that its forecasts were likely to be revised further downwards still. Jean-Philippe Cotis, the OECD’s chief economist, said: “Prospects going forward are now clearly less buoyant and more uncertain. Downside risks have become more ominous, in a context where overall financial market conditions are likely to remain durably tighter.”

The OECD forecast that the US economy would grow by just 1.9 per cent this year, against a previous forecast of 2.1 per cent. However, it argued that the strength of consumer demand in the US, the world’s largest economy, could help to prevent a housing slump developing into a general recession.

France’s economy is now forecast to expand by 1.8 per cent this year, rather than 2.2 per cent, the OECD said. However, Hervé Novelli, France’s Foreign Trade Minister, responded by saying that there was no reason for the Government to change its forecast of 2.25 per cent growth.

Germany and Italy also saw their predicted growth rates cut. However, the OECD sharply raised its forecast for Britain’s growth rate, to 3.1 per cent, from 2.7 per cent.

The OECD urged the European Central Bank to “wait and see” before raising interest rates, although it said that underlying inflation was high enough to warrant higher rates if market conditions were calmer.

Mr Cotis said that the US would suffer a marked slowdown in the second half of the year, adding that “there may be a case for some easing in the US Federal Funds target rate”.

He said that the OECD had expected the Federal Reserve to begin lowering rates in 2008, but that it might make sense to bring the cuts forward.

However, Mr Cotis said, central banks should never cut interest rates to bail out those who have suffered losses because of excessive risk-taking.

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