November 14, 2008 / 10:43 AM / in 9 years

OECD sees recession hitting, urges stimulus moves

PARIS (Reuters) - The Organization for Economic Cooperation and Development slashed its economic output forecasts for the United States, Japan and euro zone on Thursday and said the 30-nation OECD area appeared to have entered recession.

“OECD projections point to a protracted downturn with GDP likely to decline by 1/3 of a percent in 2009 but the uncertainties are large,” the Paris-based think tank said.

After a sharp slowdown in the fourth quarter, when the world’s largest economy was expected to contract 2.8 percent, U.S. gross domestic product was forecast to fall 0.9 percent in 2009 compared with 1.4 percent growth in 2008.

Both Japan and the euro zone were also projected to slide into recession. The OECD forecast Japanese GDP would drop 1.0 percent in the fourth quarter and 0.1 percent in 2009, while

euro zone output would shrink 1.0 percent and 0.5 percent in the same periods.

The OECD’s forecast of an annualised 0.4 percent contraction for Japan in July-September would already put the world’s second-largest economy in recession. This is much bleaker than the market consensus, with a Reuters poll last week producing a median forecast of 0.3 percent growth.

Shortly before the forecast appeared, Germany said its GDP fell 0.5 percent in the third quarter, taking the euro zone’s largest economy into recession for the first time in five years.

The OECD acknowledged that great uncertainty surrounded its forecasts. “The distribution of risks around the projection is wide. In 2009, these risks are skewed on the downside,” it said in a statement accompanying the projections, released before an emergency meeting of world leaders in Washington this weekend to tackle the financial crisis.

Risks included financial conditions taking longer to return to normal than expected, further bank failures and emerging markets being hit harder than expected.

The projections saw a sharp drop in inflation but OECD economists saw only a slight threat of deflation apart from in Japan, where it was forecast to set in next year.

“I would not see that (deflation) as something that has a high probability but it’s one of these outcomes on the lower end of the probability distribution,” Joergen Elmeskov, director of the OECD’s economic policy studies branch, told Reuters.

FISCAL STIMULUS

After a series of big rate cuts by central banks around the world in recent weeks, the OECD said it was time for some governments to provide an extra boost in the form of fiscal stimulus despite already heavy public debt burdens.

“The need is probably larger in the countries where the scope for monetary easing is limited and where the automatic stabilizers are relatively weak and that would be the U.S. and Japan,” Elmeskov said.

“The need is perhaps less in the euro zone because there’s still some ammunition left in monetary policy,” he said.

The U.S. Federal Reserve cut its benchmark interest rate to 1.0 percent last month and the Bank of Japan lowered its main rate to 0.3 percent, so the European Central Bank appears to have most scope for a cut.

The OECD forecast the main euro zone rate would fall 125 basis points from the current 3.25 percent in the next few months. “That would obviously be distributed over some series of cuts,” Elmeskov said. “Basically we have assumed that they are down to 2 percent in relatively early 2009.”

The OECD forecasts assume that the extreme financial stress seen since September will be short-lived, although it said the need for fresh measures to stabilize markets could not be ruled out. But it said falls in housing markets still had a “long way to go” in many European countries.

Additional reporting by Yuzo Saeki in Tokyo

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