Economy contracting, slow recovery seen: OECD

WASHINGTON (Reuters) - The economy has probably slipped into a recession that will last through the middle of 2009, and recovery will be slow as consumers cut spending to rebuild lost wealth, the OECD said on Tuesday.

Another fiscal stimulus package may be needed soon if financial conditions do not quickly improve, but once the crisis has passed the focus should shift to reducing the budget deficit and addressing rising entitlement spending.

The Organization for Economic Cooperation and Development, based in Paris, also said the United States needed an overhaul of financial regulation and supervision, a process which should be started soon to boost investor confidence and help revive the economy.

"The U.S. economy is likely to have already entered a recession and the near-term prospect is for further weakness," the OECD said.

It repeated a forecast it gave on November 13 that the economy would likely contract 0.9 percent next year, after 1.4 percent growth in 2008.

"As financial conditions normalize and the housing downturn bottoms out, the economy is projected to grow again in the third quarter of 2009, albeit at a moderate pace since consumer spending is likely to be restrained by reduced confidence and loss of wealth," the OECD said.

U.S. household wealth has taken an estimated $7 trillion hit from the tumbling housing and stock markets, and consumers are already curbing spending to try to recoup some of those losses. That will undoubtedly hurt growth because consumer spending accounts for two thirds of U.S. economic activity.

"In 2010, economic activity, still supported by substantial monetary policy stimulus, is expected to gradually accelerate," the OECD said, pegging 2010 growth at 1.5 percent.

The group said disruption in financial markets have lowered the potential growth rate of the economy much more than estimated, which diminishes the prospects of a rapid recovery.