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OECD says developed world in recession

(Agencies)
Updated: 2008-11-13 23:44

LONDON -- The world's developed economies, hard hit by the financial crisis, have slid into recession and will shrink further in 2009, a top international organization said Thursday.

Related readings: IMF: Growth to fall from 9.3% to 8.5% World Bank raises China 2008 growth forecast to 9.8%

In its latest economic forecasts, the Paris-based Organization for Economic Cooperation and Development said gross domestic product was likely to fall by 0.3 percent in 2009 for its 30 member countries, representing democracies with market economies.

It said the US economy would contract next year by 0.9 percent, Japan's by 0.1 percent and the euro area by 0.5 percent.

Additionally, it was the first time since 1974-5, when they were suffering from the Arab oil embargo and a severe bear market for stocks, that the US, Europe and Japan have fallen into recession.

This time, all three are shrinking in the same year; in the wake of the first oil price shock in 1973, Japan saw negative growth in 1974 followed a year later by the US and Europe.

And it was the first time the organization has seen an aggregate shrinkage in its members economies since it started keeping records in 1970.

The latest forecasts represent a sharp downgrade since the last set in June, when the OECD forecast OECD growth of 1.7 percent in 2009 and indicated that the worst of the financial crisis might have passed. Since then though, the outlook for the world economy has deteriorated sharply in the wake of the banking crisis, which is rapidly spreading to the wider economy.

For the fourth quarter, the organization said its members would likely see a contraction of 1.4 percent on a year-on-year basis, with the US down 2.8 percent, and Japan and the euro area 1.0 percent lower. Negative growth will be recorded through the second quarter of 2009, meeting the technical definition of recession as two or more consecutive quarters of negative growth.

"The OECD area economy appears to have entered recession," said Jorgen Elmeskov, director of the policy studies branch and the OECD's economics department. He said that while the picture was uncertain "projections point to a protracted downturn" with recovery not likely before the second half of next year, with the US leading the way out of recession.

Key risks include a longer than anticipated return to normal in financial markets, which have fallen sharply. The OECD's projections assume that the financial stress since the banking crisis exploded in mid-September will prove to be "short-lived" but be followed by an "extended period of financial headwinds" through the end of next year, with conditions then returning to near normal.

Other hazards include further failures of financial institutions; emerging market economies being hit harder by the downturn in global trade, and foreign investors turning even more more risk-shy.

More hopeful possibilities included a quicker than expected adjustment in bank balance sheets following concerted measures by management, central banks and governments around the world to shore up their finances, and more substantial fiscal stimulus measures from governments in the form of higher spending and lower taxes.

However, Elmeskov said any government measures should be "timely and temporary and designed to so as to ensure maximum effectiveness" and that a credible framework is in place to ensure budget responsibility in the long-term.

Tax cuts aimed at credit-starved consumers might prove effective, he added.

This weekend's meeting of the Group of 20 industrialized and emerging economies in Washington is expected to back coordinated tax cuts or spending boosts around the world.

The OECD also put its weight behind efforts to bolster the regulatory framework for the financial world, in particular to increase transparency and prevent a recurrence of the financial aspects of the crisis, which started with the collapse of the market for bonds based on US mortgages to people with shaky credit.

"It will also be necessary to re-examine the features of the regulatory and supervisory framework that created incentives for excessive risk-taking and led financial institutions to increase leverage in non-transparent ways to levels that proved to be unsustainable," said Elmeskov.

Though the leaders of the G-20 will be discussing reform proposals, final agreements on concrete measures are expected to wait until after President-elect Barack Obama enters the White House in January.