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Faster-Than-Expected Global Recovery Coming, Says OECD

Source: Wall St. Journal

Posted on 03 Sep 2009

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The global economy is emerging from its worst slump since World War II faster than forecasts indicated only three months ago, said the Organization for Economic Cooperation and Development (OECD).

In a twice-yearly update to its main economic forecasts, the OECD said the drag on growth from the drawdown on inventories appears to be coming to an end.

With global trade flows set to recover, the Paris-based think-tank said it now expects the combined gross domestic product of the Group of Seven leading economies to contract by 3.7 percent this year, having forecast in June that it would shrink by 4.1 percent.

"There is a recovery at hand now," Jorgen Elmeskov, the OECD's acting chief economist, told Dow Jones Newswires in an interview. "The worst is over, and the recovery appears now to be coming a little sooner, and possibly also marginally stronger, than three months ago."

As a consequence of the earlier-than-expected recovery, the OECD said the rise in unemployment should ease.

But it warned that, with bank lending continuing to fall, the pace of recovery will continue to be modest "for some time to come."

"The kind of recovery we foresee is a weakish one," Mr. Elmeskov said. "It's not as if as all the problems are behind us."

The OECD said it is now less likely that further fiscal stimulus will be needed to restore growth.

But as finance officials from the Group of 20 largest economies prepare to meet in London Sept. 4-5, the OECD also warned against the premature withdrawal of stimulus.

In particular, it said the leading central banks shouldn't be tempted into tightening policy until "well into 2010, and in some cases even beyond."

"The numbers wouldn't have looked this good if it hadn't been for the stimulus both from governments and from the monetary policy undertaken by central banks," Mr. Elmeskov said. "Substantial slack combined with the prospect for a weak recovery, implies that strong policy stimulus will continue to be needed in the near term."

But the think-tank said policy makers should prepare "exit strategies" for the eventual removal of stimulus. The timing, sequencing and coordination of those strategies will be discussed at the meeting of G20 officials.

"At some point central banks will need to move back to normality, but not any time soon," Mr. Elmeskov said. "When, down the line, inflationary pressures are back they want to be able to move into restrictive territory, and they don't want to have to move all the way from low rates."

The one notable exception is Japan, where rates will need to be kept at an "extremely low level" for "quite some time," Mr. Elmeskov said.

The OECD said it continues to expect the U.S. economy will contract by 2.8 percent this year, while expanding in the third and fourth quarters.

But it said it now expects the euro-zone economy to contract by 3.9%, having previously forecast a drop in GDP of 4.8 percent, while it expects the Japanese economy to contract by 5.6 percent, and not 6.8 percent as forecast three months ago.

The only major economy for which the OECD forecasts a larger contraction than previously is the U.K. It now expects the U.K.'s GDP to fall by 4.7 percent this year, having previously forecast it would shrink by 4.3 percent.

The U.K. is one of three G7 economies -- including Italy and Canada -- that the OECD expects to remain in recession during this quarter. Indeed, it doesn't expect the U.K. to experience a quarter of growth this year.

The OECD said a sizable contribution to the recovery will come from large emerging-market economies, notably China and Asian countries, where the recovery that began earlier this year is gaining momentum, the OECD said.