LONDON – The world's developed countries, hard hit by the financial crisis, have probably tipped into a recession that will last at least through the first half of 2009, according to new projections issued Thursday.
The Paris-based Organization for Economic Cooperation and Development forecast that economic output would shrink 1.4 percent this quarter for the 30 market democracies that make up its membership — and keep contracting until the middle of next year.
That would mean the developed world has now entered a slump estimated to last at least three quarters; two consecutive quarters is a common definition of recession. For all of 2009, these countries' economies would contract by 0.3 percent.
Additionally, the U.S. economy would fall by 2.8 percent in the last quarter, after a 0.3 percent drop in the third quarter and then shrink by a full 0.9 percent in 2009. Japan's economy would shrink by 0.1 percent next year and the euro area by 0.5 percent.
That would be the first time since 1974-5, when they were suffering from the Arab oil embargo and a severe bear market for stocks, that the U.S., Europe and Japan have fallen into recession around the same time. In the wake of the first oil price shock in 1973, Japan saw negative growth in 1974 followed a year later by the U.S. and Europe.
And it was the first time the organization has seen an aggregate shrinkage in its members economies since it started keeping records in 1970.
The latest forecasts represent a sharp downgrade since the last set in June, when the OECD forecast OECD growth of 1.7 percent in 2009 and indicated that the worst of the financial crisis might have passed. Since then though, the outlook for the world economy has deteriorated sharply in the wake of the banking crisis, which is rapidly spreading to the wider economy.
The OECD's predictions echo those made from the International Monetary Fund last week. It too said economies of the US., Europe and Japan are set to contract in 2009 as part of the first annual decline by the advanced economies since World War II.
The fund cut its forecast for the developed countries' economies to a decline of 0.3 percent next year, the same as the OECD's new predction, from the previous estimate of 0.5 percent growth.
"The OECD area economy appears to have entered recession," said Jorgen Elmeskov, director of the policy studies branch and the OECD's economics department. He said that while the picture was uncertain "projections point to a protracted downturn" with recovery not likely before the second half of next year, with the U.S. leading the way out of recession.
The OECD's bleak assessment of the world economy came as Germany officially sank into recession. Official figures showed that Germany's gross domestic product contracted by 0.5 percent in the July-September period compared with the previous quarter. The fall was much steeper than the 0.2 percent predicted by economists.
That fall followed a 0.4 percent drop in output in the second quarter, which was the first decline since late 2004.
The OECD identified a number of risks to its outlook, not least the possibility of a longer than anticipated return to normal in financial markets. It said its projections assume that the financial stress since the banking crisis exploded in mid-September will prove to be "short-lived" but be followed by an "extended period of financial headwinds" through the end of next year, with conditions then returning to near normal.
Other hazards include further failures of financial institutions; emerging market economies being hit harder by the downturn in global trade, and foreign investors turning even more more risk-shy.
More hopeful possibilities included a quicker than expected adjustment in bank balance sheets following concerted measures by management, central banks and governments around the world to shore up their finances, and more substantial fiscal stimulus measures from governments in the form of higher spending and lower taxes.
Tax cuts aimed at credit-starved consumers might prove effective, he added.
This weekend's meeting of the Group of 20 industrialized and emerging economies in Washington is expected to discuss coordinated tax cuts or spending boosts around the world.
The OECD also put its weight behind efforts to bolster the regulatory framework for the financial world, in particular to increase transparency and prevent a recurrence of the financial aspects of the crisis, which started with the collapse of the market for bonds based on U.S. mortgages to people with shaky credit.
"It will also be necessary to re-examine the features of the regulatory and supervisory framework that created incentives for excessive risk-taking and led financial institutions to increase leverage in non-transparent ways to levels that proved to be unsustainable," said Elmeskov.
AP
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