Tuesday, Nov 25, 2008


 
   By Gabriele Parussini and Paul Hannon 
   Of DOW JONES NEWSWIRES

PARIS (Dow Jones)--With 21 of its 30 members facing a long and protracted recession, the current economic downturn will be the worst since 1982, the Organization for Economic Cooperation and Development said Tuesday.

In its twice-yearly report on the outlook for the global economy, the Paris-based think tank slightly lowered its forecast for growth in 2009 from projections released as recently as Nov. 13.

It now expects the combined gross domestic product of its members to fall 0.4% next year, having previously forecast it would fall 0.3%. That is largely because it now expects the combined GDP of the 15 countries that use the euro to fall by 0.6% next year, having previously forecast it would fall by 0.5%. It continues to expect that the U.S. economy will contract by 0.9% next year, while it expects the Japanese economy to shrink by 0.1%.

The OECD stuck to its Nov. 13 forecasts for 2010, projecting a rebound in growth in its 30 members to 1.5%, with the U.S. economy expanding by 1.6%, the Japanese economy by 0.6% and the euro-zone economy by 1.2%.

The OECD said the downturn will hit some of its members harder than others, and identified Hungary, Iceland, Ireland, Luxembourg, Spain, Turkey and the United Kingdom as the economies that will suffer most.

"These economies are most directly affected by the financial crisis, which in some cases has exposed other vulnerabilities, or by severe housing downturns," the OECD said.

It said that even over the last two weeks, the downside risks to the economic outlook have increased. In particular, it said it may take longer than it had expected for the financial system to begin to function normally, while major financial institutions may fail.

OECD Chief Economist Klaus Schmidt-Hebbel told Dow Jones Newswires the world economy is unlikely to experience a contraction as severe as during the Great Depression.

But he said the downturn will be the most severe in over a quarter of a century.

"At its trough, this recession will be slightly less painful than that of 1982," Schmidt-Hebbel said. "Downside risks to our forecast are more severe now than they were two weeks ago."

Schmidt-Hebbel said that at the worst point of the recession of the early 1980s, when regime change in Iran prompted world oil prices to skyrocket, the gap between actual and potential output reached 4.3%. At the trough of the current downturn, in mid-2010, that gap will reach 3.2%, the OECD said.

The OECD has long urged governments to cut their budget deficits and reduce their overall debt levels in order to prepare for the additional costs of providing pensions and health care to aging populations.

But the OECD is now urging members to press ahead with fiscal stimulus packages, although it warned that plans crafted to boost economic growth should be temporary and last not more than two years, so that the sustainability of public finances can be restored in the medium term.

However, the OECD said any stimulus should be spread across the whole of the economy, and not targeted at particular sectors, irrespective of their perceived importance.

"Countries should use fiscal and monetary policy over bailouts of single sectors," Schmidt-Hebbel said.

Hard-pressed automobile makers in the U.S. and Europe have been pressing governments for loans to help them weather the downturn, which has led to a sharp drop in sales.

But Schmidt-Hebbel said the automobile industry isn't comparable to the financial sector in terms of its importance to the functioning of a market economy.

"The auto industry doesn't hold systemic importance," he said. "If a company shuts down, this won't stop people from buying cars from its competitors, quite the contrary."

He said that some countries may be in the process of losing their competitive edge in some industries, and there's no point in fighting rearguard battles to keep them alive. U.S. auto workers, for example, should be retrained, he said.

The OECD also urged central banks to continue to cut interest rates. It said the U.S. Federal Reserve should cut its key rate to 0.5% from 1.0%, and shouldn't hike until "there are clear signs that financial stress is abating, which may not occur until towards the end of 2009."

It said that given the "recent rapid deterioration in the outlook for activity, evidence of falling inflation and stronger credit constraints" the European Central Bank should cut its key rate to 2% from 3.25% by early 2009.

And it said the Bank of Japan should leave its key interest rate at 0.3% "possibly even beyond 2010," since there is a need "to let inflation rise to create some buffer against the risk of deflation."

Schmidt-Hebbel said emerging economies - including Brazil, India, China and Russia - could be hit much harder than expected from the slowdown in global trade and from increased risk aversion among global investors.

"The major emerging market economies will see some further deceleration in activity, reflecting weak demand in the OECD area, a re-pricing of financial risks and the lagged effects of earlier policy reactions to address inflationary pressures," the OECD said.

The OECD said it expects China's economy to grow by 8.0% in 2009, a slowdown from the 9.5% rate of growth it estimates for this year.

"A risk to growth is that exports prove to be more sensitive to falling foreign demand than assumed in the projections or that exporters do not cut prices," the OECD said.

-By Gabriele Parussini and Paul Hannon; Dow Jones Newswires; +33 1 4017 1740; gabriele.parussini@dowjones.com

(END) Dow Jones Newswires

25-11-08 1247GMT