The OECD's volte-face over the dangers of spending cuts gives the chancellor plenty of cover to rethink his approach. If he doesn't, he will be making a catastrophic blunder

It was like manna from heaven for George Osborne when the west's leading economic thinktank instructed its rich members back in May to tackle budget deficits without delay.

Having arrived at the Treasury armed with his austerity plans, this was just the sort of international backing the new chancellor of the exchequer needed. The coalition government had already won the support of the governor of the Bank of England; now it could claim the support of the Organisation for Economic Co-operation and Development.

That was then. Three months or so later, the Paris-based group has had a crash re-think. Across the G7 group of countries, the picture is the same, it says: growth rates in the second half of 2010 will be lower than in the first six months of the year: "Recent high-frequency indicators point to a slowdown in the pace of recovery of the world economy that is somewhat more pronounced than previously anticipated". If you are wondering what that tortured prose actually means, it can be expressed quite succinctly as "Careful: that looks like an iceberg ahead."

As things stand, the OECD is unsure whether this is a temporary pause in economic recovery or something more serious. If it is just a blip, the thinktank suggests that central banks delay any rise in interest rates for a few months – something that was never going to happen in the UK in any event. The Bank of England, as predicted, left rates on hold today.

But if "the slowdown reflects longer-lasting forces bearing down on activity", the implications are more profound. Central banks should stand ready to pump more money into their economies through quantitative easing, the OECD says – something the US Federal Reserve and the Bank of England have already discussed – while finance ministers could delay their austerity programmes "where public finances permit".

There are three points here. The first is whether the current slowdown does reflect "longer-lasting forces bearing down on activity". The fact that credit markets are still dysfunctional, that the US housing market has clearly entered the second phase of a double-dip recession, and that Germany and Japan are relying heavily on exports for their growth, suggest that many of the structural problems that led to the world's worst post-war recession remain unsolved. Despite the unprecedented policy response, the global economy remains fragile.

The second point relates to the resilience of the UK. Osborne's belief is that hacking away at public spending will create space for the private sector to flourish. Britain will cease to be so dependent on consumer spending and the state for its growth; instead, resources will shift to manufacturing and exports, thus reducing both household debt and the size of the UK's current account deficit.

Such an outcome is much to be desired but, as today's trade figures show, it remains a long way off. Far from benefiting from the 20% drop in sterling over the past three years, the trade gap in the three months to July was the worst on record. Only the efforts of the City, which boosted the UK's surplus in service sector trade, prevented an even worse outcome. Not much sign of rebalancing there.

Finally, there's the issue of whether the state of the public finances permits Osborne to revise his draconian plans. The chancellor's argument back in May was that the UK risked becoming the next Greece unless the new government started to clear up the mess left by Labour immediately. That argument always seemed far-fetched and looks even less compelling today, with markets far more concerned about growth and possible deflation than they are about sovereign risk.

To sum up, then: the world economy is clearly slowing; both the OECD and the International Monetary Fund are now warning against over-aggressive tightening of policy; Britain's economy is both unbalanced and weakening; and in less than six weeks' time the government is planning to announce the biggest programme of spending cuts since the 1930s. Osborne has now been given a perfect excuse for moderating his plans. If he carries on regardless, he risks making the biggest economic blunder since John Major took Britain into the Exchange Rate Mechanism.