OECD warns of worst recession since early 1980s

OECD says developed world could face worst recession since early 1980s; warns of deflation

LONDON (AP) — The financial crisis will likely push the world’s developed countries into their worst recession since the early 1980s, the Organization for Economic Cooperation and Development (OECD) said Tuesday.

In its half-yearly economic outlook, the Paris-based organization said economic output will likely shrink by 0.4 percent in 2009 for the 30 market democracies that make up its membership, against the 1.4 percent growth prediction for 2008. As a result, the OECD said it supported fiscal rescue measures, including tax cuts, provided they were targeted and temporary.

The OECD said the number of unemployed across its members could rise by 8 million over the next two years and that there is a risk, “albeit small,” that some countries will experience deflation — falling prices.

The OECD said the U.S. was likely to contract by 0.9 percent in 2009 following a 1.4 percent expansion this year. Japanese output is only expected to contract by 0.1 percent in 2009 following 0.5 percent growth this year, while the 15-nation euro-zone will likely shrink by 0.6 percent next year after 1.0 percent growth this.

The OECD’s latest 2009 projections for the world’s leading three economic areas are more or less the same as the preliminary forecasts made earlier this month ahead of the G-20 meeting of world leaders in Washington, with only 2009 growth in the euro-zone revised down from the previous estimate of -0.5 percent.

The OECD said economic growth of its membership fell by an annualized quarter-on-quarter 0.2 percent in the third quarter this year and will keep contracting until the middle of 2009. The biggest loss of output in the OECD is expected to occur during the fourth quarter of 2008, with a 1.4 percent contraction predicted.

The figures indicate that the developed world has now entered a slump estimated to last at least four quarters; two consecutive quarters is a common definition of recession.

“Many OECD economies are in, or are on the verge of, a protracted recession of a magnitude not experienced since the early 1980s,” said Klaus Schmidt-Hebbel, the OECD’s chief economist

The OECD said the U.S. economy would contract by an annualized rate of 0.3 percent in the third quarter, followed by a massive 2.8 percent decline in the last quarter. Recovery is only anticipated in the third quarter of 2009 when output is set to spike 0.6 percent as the effects of the credit squeeze abate, the housing downturn bottoms out and low interest rates bear fruit.

In the euro-zone, output is seen to have fallen by 0.9 percent in the third quarter, followed by a 1.0 percent decline in the fourth. As in the U.S, output is not expected to rebound until the third quarter of 2009, and only then by the modest amount of 0.1 percent. Official European Union figures earlier this month confirmed that the euro-zone as a whole is in recession.

In Japan, the recession, which started in the second quarter of 2008, is only expected to last through to the first quarter of 2009, when output is expected to rebound by an annual rate of 0.8 percent. However, output is set to stagnate over the second half of 2009 as the global economic downturn and the recent rise in the yen hits demand for Japanese goods.

Because of the anticipated bounce-back in growth by the second half of next year, the OECD projected that economic output across its membership will rise in 2010 by 1.5 percent.

The OECD’s Schmidt-Hebbel said “prompt and massive” policy action to restore confidence and provide liquidity in the banking sector appears to have “successfully limited the period of panic” but that financial institutions still need to repair their balance sheets.

“This process of adjustment will take some time and impair the flow of credit, and is the key factor weighing on activity going forward,” he said.

The uncertainties around the projections are “exceptionally large”, mainly on the downside and mostly relate to the assumption regarding the speed at which the financial market crisis is overcome, said Schmidt-Hebbel.

“Specifically, we assume that the extreme financial stress since mid-September will be short-lived but will be followed by an extended period of financial headwinds through late 2009, with a gradual normalization thereafter,” he said.

The OECD added that there was a justification for governments around the world to cut taxes or raise spending to ameliorate the effects of the recession.

“Against the backdrop of a deep economic downturn, fiscal policy stimulus has an important role to play,” Schmidt-Hebbel said.

“It is vital that any discretionary action by timely and temporary,” he said.

The OECD highlighted a number of countries where the downturn will be severe, partly because of falling house prices. These include Britain, Hungary, Iceland, Ireland, Luxembourg, Spain and Turkey.

“These economies are most directly affected by the financial crisis, which in some cases has exposed other vulnerabilities, or by severe housing downturns,” said Schmidt-Hebbel.

The OECD said Britain will see output decline by 1.1 percent in 2009 after growing by only 0.8 percent in 2008. The forecasts are similar to those announced Monday by the British government following its 20 billion pound ($30 billion) stimulus package.

Elsewhere, the OECD said economic growth in China will remain below the double-figure rates experienced over the last few years through to the end of the decade. For 2009, the OECD projected Chinese growth to moderate to 8.0 percent.

Tuesday November 25, 6:54 am ET
By Pan Pylas, AP Business Writer

Source: AP

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