OECD predicts 4.3% contraction in richest economies this year

 

THE ECONOMIES of the world’s 30 richest nations will contract by 4.3 per cent this year, and unemployment will reach double digit figures by the end of 2010, the Organisation for Economic Co-operation and Development predicted in its mid-term report yesterday, which was timed to precede tomorrow’s G20 summit in London.

“The world economy is in the midst of its deepest and most synchronised recession in our lifetimes, caused by a global financial crisis and deepened by a collapse in world trade,” said Klaus Schmidt-Hebbel, the OECD chief economist who presented the report at a press conference. World trade will decrease by 13.2 per cent this year, he predicted.

“Tight financial conditions and low confidence are weighing on output and employment in OECD and non-OECD countries alike,” Mr Schmidt-Hebbel said. “In turn, shrinking activity and income is further undermining bank balance sheets, magnifying the downturn.”

The organisation has called for countries with the scope for further action to consider additional stimulus in 2010 and as recovery strengthens, to reduce or reverse the measures to strengthen public finances for the long term.

However, Ireland was identified as having limited scope to boost spending during the economic recession, along with Japan, Italy, Greece, Hungary and Iceland.

The organisation claimed the case for increased stimulus would not be justified for some countries unless economic activity turns out to be even weaker than projected.

Instead, the OECD pointed to Germany, Canada, Australia, the Netherlands, Switzerland, Korea and some Nordic countries as having scope for further action.

Discretionary stimulus measures taken by governments in response to the economic crisis could increase GDP on average by around 0.5 per cent in 2009 and 2010, according to the OECD’s Economic Outlook Interim Report. The report says Japan will be the hardest-hit OECD member, with its economy shrinking 6.6 per cent this year and 0.5 per cent next year. The euro group will contract 4.1 per cent this year, and 0.3 per cent next year. The US economy fares slightly better, contracting 4 per cent this year and stagnating in 2010. Unemployment will be higher in the euro zone, at 10.1 per cent in 2009 and 11.7 per cent in 2010, compared to 9.1 per cent in the US this year and 10.3 per cent next year.

Mr Schmidt-Hebbel cautioned that all predictions are subject to “exceptionally large uncertainties”. The OECD nonetheless anticipates “that the ongoing contraction in economic activity will worsen this year, before a policy-induced recovery gradually builds momentum through 2010”.

The OECD forecast is the most pessimistic yet. Last November’s report was based on a “shallower recession”, Mr Schmidt-Hebbel said. The OECD had identified three factors that could worsen the situation: the depth of the financial crisis; interlinkage between the financial crisis and the real economy, and a breakdown in the industrial manufacturing sector. “These three factors materialised. Even today, we think the negative risks still dominate,” Mr Schmidt-Hebbel explained.

The report identifies three major risks: that the weakening economy will further undermine the health of financial institutions; that government actions will prove insufficient to restore stability and confidence in financial markets, along with the danger of external-payments and domestic banking crises in central/east European and developing countries.

A “coherent strategy that squarely tackles the mess in financial markets” means creating transparency about toxic assets, separating institutions that are viable from those that are not, and where necessary, recapitalising. Nationalising banks, perhaps temporarily, is a method of last resort, the OECD says.

In remarks geared to the G20 summit, Mr Schmidt-Hebbel said international co-ordination was needed to arrive at “a common understanding of the severity of the recession and the required policy response”. The financial system “must be reformed in a way that prevents the recurrence of similar crises in the future”.