The Organisation for Economic Co-operation and Development (OECD) released a report Tuesday with analysis of recent global economic developments and focuses on policy actions required to foster a sustained recovery. The Interim Economic Outlook Report covers the outlook to end-2010, providing detailed economic projections for the major seven (G7) economies and the OECD area as a whole.
OECD’s economic outlook on the United States is that of a gradual recovery that may take hold next year as financial conditions improve and macroeconomic policies exert a growing positive impulse. The key to ending the financial crisis, notes the report, and thereby laying the foundation for a more rapid recovery, is to ensure some measure of financial stability so that credit can flow normally to creditworthy households and firms.
In response to the opening of a substantial output gap and with commodity prices assumed to remain flat, inflation should fall noticeably and deflation may become a threat in 2010.
Japan – The significant drop in the job-offer-to-applicant ratio indicates that unemployment will increase significantly from its current level of around 4%. With the external sector remaining a drag on activity, output is projected to continue contracting during the course of 2009. Domestic demand is expected to lead a modest recovery in 2010, although growth will still be less than 1% by the end of the year. With output growth remaining below potential through 2010, the unemployment rate is likely to rise above 5½ per cent and deflation may become entrenched.
Euro Area – Output has fallen rapidly in the euro area and further significant declines in GDP in the near term are likely. GDP declined by an annualised rate of almost 6% in the fourth quarter of 2008 and a similar decline appears likely in the first quarter of 2009. Additional stimulus may be warranted in some countries in the short term, especially if the situation should deteriorate further than presently projected, but will have to be withdrawn rapidly once the recovery is well underway. Economic activity is projected to decline further until the end of 2009.
Germany – Exports continued to fall sharply at the beginning of the current year and the decline of industrial production has accelerated. Output losses will continue throughout 2009, reflecting weak exports and private investment in machinery and equipment. The unemployment rate is projected to climb to almost 12% by end-2010. Given the rapid deterioration in economic activity, further stimulus measures are needed and should be implemented quickly.
France – Real GDP is projected to shrink by over 3% in 2009, with the pace of contraction gradually diminishing throughout the year. Improving credit conditions and policy stimulus at home and abroad will contribute to a recovery in 2010, although activity will remain subdued and fragile due to weak private-sector balance sheets. To avoid a prolonged paralysis of the financial system, notes the report, the authorities have created two vehicles, one to allow the banks to refinance themselves with a state guarantee and another to provide them with equity to bolster their solvency. Inflation could fall to near zero by end-2010.
Italy – The recession is projected to deepen in 2009 as investment falls sharply, export markets contract and uncertainty dampens consumer expenditure. Italy’s open economy and export product mix expose it to the full force of recession in other countries. The recovery is likely to be slow and unemployment will rise steeply this year and into 2010. Inflation will fall to near zero by the end of next year. The budget deficit will widen sharply reaching nearly 5% of GDP this year and 6% in 2010.
United Kingdom – Economic conditions are set to deteriorate further, with output projected to decline by 3.7% in 2009. Equity and property prices have tumbled, contributing to the erosion of financial sector balance sheets and impeding the supply of credit, thus restraining household and business spending. The unemployment rate could rise to over 10%, while inflation is likely to stay well below the 2% target for an extended period.
The government has introduced wide-ranging measures to address the financial sector. Monetary policy has eased dramatically. The Bank of England cut the bank rate dramatically from 5% in October to 0.5% in March — the lowest level in the 300 year-history of the institution. These policy measures, the lower exchange rate and some improvement in the external environment should underpin a moderate recovery during 2010.
Canada – Real GDP declined at an annual rate of 3.4% in the fourth quarter of 2008 and, according to the latest indicators, it is now contracting at an even faster pace. Employment is falling more rapidly than in the downturns of the 1980s and 1990s, and the unemployment rate has jumped. Fortunately, Canada‟s large financial institutions have not been as badly affected by the financial crisis and credit conditions therefore remain much healthier than in other major countries. Given well-anchored inflation expectations and a strong fiscal position, both monetary and fiscal authorities are in a position to do more. The Bank of Canada should consider quantitative easing measures.
Report available here.