Grim outlook for rich nations

Abnormal times

The organisation delivered its grim prognosis in its OECD economic outlook report which looks in detail at its 30 prosperous members, which account for about 60 per cent of the world economy. 

The report said that many OECD countries would not return to their long-term average growth rates until mid-2010.

Britain’s finance minister has announced a $30bn stimulus package [EPA]

A number of countries have rolled out stimulus packages for their economies in recent weeks, with Britain becoming the latest on Monday with a $30bn package of measures including tax cuts.

The OECD backed the idea of such government measures to tackle 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. 

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

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

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

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

The report forecast the jobless rate in the zone would rise from 5.5 percent in early 2008 to 7.25 percent in 2010. 

Financial mayhem

The United States, Asia 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.

The OECD report said: “Of particular concern is the possibility of a negative feedback loop whereby additional real economy weakness exacerbates problems in already fragile financial markets.” 

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 per cent, the eurozone by 1.2 per cent and Japan by 0.6 per cent.