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Business

OECD wants more stimulus amid stronger GDP contraction

Video by Siobhán SILKE

Latest update : 2009-04-01

The OECD has declared the economic crisis to be the worst in 50 years and has forecast a contraction of world economy of 4.3%, and of 4.1% for the Eurozone. The organization asked for more stimulus action to limit the negative growth in 2010.

AFP - The world economy is now gripped by the worst recession in 50 years, the OECD said Tuesday, calling on governments to step up stimulus spending to spark a recovery in 2010 likely to be "muted" at best.
  
"The world economy is in the midst of its deepest and most synchronised recession in our lifetimes, caused by a global financial crisis and deepened by a collapse in world trade," OECD chief economist Klaus Schmidt-Hebbel wrote in a report.
  
The economies of the 30 industrialised members of the Organisation for Economic Cooperation and Development are projected to contract 4.3 percent this year before strengthening somewhat to show negative growth of 0.1 percent in 2010.
  
Growth in 2009 was forecast to contract 4.0 percent in the United States, 4.1 percent in the eurozone and 6.6 percent in Japan. The OECD sees economic momentum worldwide shrinking 2.75 percent this year before recovering by 1.25 percent in 2010.
  
The OECD issued its findings ahead of a crisis summit Wednesday in London of leading industrialised and emerging market nations in the Group of 20, where fresh measures to stop the rot are to be debated.
  
The report warned that the number of jobless workers in the Group of Seven -- Britain, Canada, France, Germany, Italy, Japan and the United States -- was likely to double from its mid-2007 level to reach 36 million in late 2010.
  
In many countries the employment rate as a percentage of the work force will rise to double digits.
  
But Schmidt-Hebbel argued: "While some have dubbed this severe global downturn a 'great recession,' it will remain far from turning into a repeat of the 1930s Great Depression, thanks to the quality and intensity of government policies that are currently being undertaken."
  
While social safety nets need to be strengthened, the report warned against "repeating the mistakes of the 1970s and 1980s when many countries attempted to reduce unemployment by encouraging early retirement, which would only reduce the labour force without boosting overall employment."
  
The report said that in light of current official policies that provide financial institutions with deposit and debt guarantees as well as insurance schemes, the "economic haemorrhaging" can be stabilised, allowing for a "muted" recovery beginning in the first half of 2010.
  
But the OECD stressed that its projections came with risk attached, notably that deteriorating macroeconomic conditions will place further pressure on financial institutions to curb critical business and consumer lending.
  
The G20 summit is expected to see a lively debate on the need for more direct government stimulus spending, as advocated by the United States, China and Japan and so far resisted by the European Union.
  
The OECD in its report Tuesday offered balanced counsel.
  
"Additional macroeconomic stimulus is also critical to cushion the fall in aggregate demand," it said, with authorities prepared to spend money to support credit creation and to boost market liquidity.
  
But it added that because such spending in one country has effects on others, "there is a role for international coordination to achieve the right amount of stimulus."
  
At the G20 gathering, the OECD said, "while explicit fiscal coordination is unlikely to be achieved, a common understanding of the severity of the recession and the required policy response should be aimed for."
  
The organisation, echoing calls from the European Union, also argued for "internationally coordinated efforts" to tighten financial market regulation and to ensure transparency.
  
In its policy recommendations the OECD noted that troubled banks in many OECD countries, notably the United States and Britain, have either been nationalised or brought under effective government control.
  
Such a step, the report maintained, should be seen as a last resort.
  
"Experience suggests that nationalisation can be effective if banks are managed at arm's length from political processes, cleaned up as quickly and efficiently as possible and resold to private investors once resolved."

Date created : 2009-03-31

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