OECD urges more stimulus to fight recession

PARIS (Reuters) - Governments and central banks should pump more support into their economies to dampen the impact of the worst recession in decades, the Organisation for Economic Cooperation and Development said on Tuesday.

In the latest edition of the OECD's Economic Outlook, the Paris-based think-tank painted a bleak picture of falling output, rising unemployment and financial uncertainty that it said would last until late 2009 at the earliest.

"Against the backdrop of a deep economic downturn, additional macroeconomic stimulus is needed," OECD chief economist Klaus Schmidt-Hebbel wrote in a preface to the report, joining the IMF which made a similar call last week.

The United States, Britain and the euro zone have either announced or are planning massive stimulus packages to help their ailing economies, following on from billions of dollars pledged to save the financial system.

The OECD had already issued an outlook on November 13 projecting the U.S. economy would contract 0.9 percent next year before rebounding in 2010 while Japan's GDP would fall 0.1 percent in 2009. However, the think-tank revised its forecast for the euro zone, saying the economy would contract 0.6 percent next year, more than the 0.5 percent it predicted earlier this month.

But Schmidt-Hebbel warned that the situation was difficult to read and there was a risk of it being worse than forecast, if financial markets do not steady or if emerging economies are hit more heavily than expected.

"The recession which we are heading into now may turn out to be even deeper and even the world economy at large may go into recession in the next months."

With inflation pressures easing everywhere and a minor risk of some countries joining Japan in falling into deflation, the report said there was scope for interest rate cuts in many areas including the euro zone, the United States and Britain.

In addition, it said governments able to do so should cut taxes and offer other fiscal support to poorer households to prop up demand. However, it warned that these stimulus measures should be dismantled once there were signs of recovery.

"PROTRACTED RECESSION"

But the OECD report said the scale of the crisis meant that unusually drastic measures were called for.

"Many OECD economies are in, or are on the verge of, a protracted recession of a magnitude not experienced since the early 1980s," it said, adding that the jobless total in the 30-member group may rise by 8 million in the next two years.

The crisis has already led to tens of thousands of job cuts in industries ranging from finance to automobiles and with stock markets plunging and house prices continuing to slide, consumer confidence has taken a battering.

The report said "prompt and massive" action by authorities appeared to have limited a wave of panic that hit financial markets after the collapse of U.S. investment bank Lehman Brothers, but the real economy was suffering badly.

"The recovery is likely to be slow and will start in late 2009 at a pace which will be subdued," Schmidt-Hebbel said.

"We will have growth starting in the third quarter of 2009 but at levels which are clearly below potential growth in most OECD countries and therefore unemployment will still be growing until mid-2010," he said.

He said the most effective support that governments could offer would be targeted tax cuts that would find their way into the economy quickly and would not be hoarded away as savings.

"In the current juncture we need a lot of immediate effectiveness in terms of hitting consumers directly, now."

Outside the United States, Japan and the euro zone, the OECD's three biggest economies, others including Britain, Ireland, Hungary, Iceland, Luxembourg, Spain and Turkey faced a severe impact.

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