Major economies in recession, US likely to shrink next year: OECD

Leading industrialized nations appear to be in a "protracted" downturn, with the U.S., Japanese and eurozone economies likely to shrink next year, the OECD said Thursday.


The Organization for Economic Cooperation and Development predicted a return to modest growth in 2010 but warned that the United States, the worlds largest economy, would suffer a whopping 2.8 percent contraction in fourth quarter 2008.  


It called for further government stimulus measures and steps to shore up financial markets but also warned against any move that would distort competition or threaten the operation of open markets.


The OECD, the Paris-based grouping of the worlds 30 most developed countries, issued a one-page statement ahead of an emergency summit in Washington Saturday of 20 developed and developing nations aimed at dousing a global financial and economic firestorm.


"The OECD area now appears to have entered recession," the statement said, with OECD projections pointing to "a protracted downturn."


It sees the OECD countries contracting 0.3 percent in 2009, after growth of 1.4 percent this year, before rebounding to 1.5 percent in 2010.


The U.S. economy will contract 0.9 percent in 2009, Japan 0.1 percent and the eurozone 0.5 percent after posting respective gains this year of 1.4 percent, 0.5 percent and 1.1 percent.


In 2010, according to the OECD, the United States should grow 1.6 percent, Japan 0.6 percent and the eurozone 1.2 percent.


The OECD said the U.S. economy shrank 0.3 percent in the third quarter this year and would contract 2.8 percent in the fourth, thereby meeting the traditional measure of recession -- two consecutive quarters of negative growth.


The United States will not enjoy positive growth -- 0.6 percent -- until the third quarter of 2009, according to the OECD.


The Japanese economy will also see negative growth in the final two quarters of 2008 before returning to positive territory -- 0.8 percent -- in first quarter 2009.


But in the third quarter of 2009, Japan will slip back and its economy will contract 0.3 percent.


In the eurozone, the economy will not begin to grow again until the third quarter of 2009, when it should expand 0.1 percent.


The OECD said its analysis was based on an assumption that the "extreme" financial market distress that erupted in mid-September would be "short-lived" but "followed by an extended period of financial headwinds through late 2009, with a gradual normalization thereafter."


It said it expected a continued moderation in inflation while "against the backdrop of a deep economic downturn, additional macroeconomic stimulation is needed," suggesting that tax cuts for credit-strapped households could prove effective.


The OECD said that in the United States and Japan the scope for additional interest rate cuts to spur momentum had narrowed. The U.S. Federal Reserve has already slashed its benchmark rate to a record low 1.0 percent while the Bank of Japan last month reduced its key rate to 0.30 percent.


Many OECD members in recent weeks have adopted vigorous measures to revive their struggling banks, notably through direct injections of capital and credit guarantees aimed at inducing them to start lending money again.


"The need for further measures to stabilize financial markets cannot be excluded," the OECD said.


It also called for "international cooperation... to avoid measures that distort competition" and said that regulatory and supervisory frameworks would have to be "re-examined."


"When addressing these issues, it will be important to focus on reforms to the global financial architecture and at the same time resist pressures for a wider rollback of open markets which would prove costly," it added.



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