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Business

Financial crisis far from over, warns OECD

Text by AFP

Latest update : 2008-11-26

Most OECD countries face their worst economic downturn for 25 years, the Paris-based organisation predicted in its OECD Economic Outlook report, while cautiously backing the idea of stimulus plans to attenuate the effects of the crisis.

Many leading industrialised nations face their worst economic downturn for 25 years, the OECD warned on Tuesday, forecasting that the US, European and Japanese economies would shrink next year.

Unemployment will rise by eight million, house prices will continue to fall in many countries and there is a risk the financial crisis has further to run, with fragile banks exposed to new bad debts.

"Many OECD economies are in or are on the verge of a protracted recession of a magnitude not experienced since the early 1980s," said the chief economist of the Organisation for Economic Coordination and Development, Klaus Schmidt-Hebbel.

The Paris-based government-funded economics institute delivered its prognosis in its OECD Economic Outlook report which looked in detail at its 30 rich-country members which account for about 60 percent of the world economy.

"The number of unemployed in the OECD area could rise by eight million over the next two years," Schmidt-Hebbel said in a statement. The report forecast the jobless rate to rise from 5.5 percent in early 2008 to 7.25 percent in 2010.

The economies of all major industrialised countries were forecast to contract in 2009, with the US economy shrinking by 0.9 percent, the eurozone by 0.6 percent, Japan by 0.1 percent and the overall OECD zone by 0.4 percent.

The organisation had already published some of the key figures 10 days ago in time for a summit of leading industrialised and emerging nations in Washington on coordonated action to fight the crisis.

"The recovery is also more typically more muted following a banking crisis," said the report, adding that many OECD countries would not return to their long-term average growth rates until mid 2010.

The OECD backed the idea of stimulus plans by governments to attenuate the effects of the financial crisis, but also highlighted the impact of debt and stressed that tax and spending plans had to be reversed when growth returned.

"In normal times, monetary rather than fiscal policy would be the instrument of choice for macroeconomic stabilisation. But these are not normal times," said Schmidt-Hebbel, who said central banks should also cut rates further.

The fiscal deficit for the OECD is set to increase from 2.5 percent of gross domestic product this year to 3.8 percent next year and 4.1 percent in 2010.

The long-term fiscal outlook in the United States appears "very unfavourable" and the country is on course to be "among the most heavily indebted of OECD countries" in the next decade.

A number of countries have rolled out stimulus packages for their economies in recent weeks, with Britain becoming the latest on Monday with a 20-billion-pound (30 billion dollars) package of tax cuts.

Incoming US president Barack Obama is said by US media to be plotting a stimulus plan worth up to 700 billion dollars when he takes office in January.

The United States and Europe have been hit hard by the financial crisis which originated in the heavily indebted, under-regulated US financial sector which was exposed to losses on subprime home loans.

The effects of more than 12 months of mayhem in the financial sector are now being seen in the real economy where corporate investments are being delayed or cancelled, jobs are being cut and consumers are holding off purchases.

This deteriorating environment risks further undermining the banking sector, which is still struggling to absorb losses on existing housing-related debt despite billions of dollars of public money.

"Of particular concern is the possibility of a negative feedback loop whereby additional real economy weakness exacerbates problems in already fragile financial markets," the OECD report warned.

Based on assumptions of no further significant worsening, the OECD forecast that growth would return to OECD countries in 2010 when the US economy would expand by 1.6 percent, the eurozone by 1.2 percent and Japan by 0.6 percent.

Date created : 2008-11-26

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